Annual report 2014
Velan worldwide
Above: VelTEX, the newest addition to the Velan distribution center network located in Houston, Texas, officially opened its doors
in November 2013.
Front Cover:
Two Velan 18" Class 300 air-operated gate valves
installed in the naphtha cracker plant.
Right: Wolfgang Maar, Executive VP
International Sales and Overseas Operations
and Chairman of the Board of Velan ABV S.p.A.,
with Paolo Ranieri, the new Managing Director/
Chief Executive Officer of Velan ABV S.p.A.,
located in Lucca, Italy.
Above: A refinery in India before
Velan coker valves were installed
to replace the existing competitor’s
valves. Right: the same refinery
after Velan valves were installed.
2014 Highlights
Sales(1)
(in millions of U.S. dollars)
550
500
450
400
350
300
250
200
150
100
50
0
2010
Consolidated
Overseas
U.S.A.
Canada
2011
2012
2013
2014
Adjusted net operating results(2)
(in millions of indicated currenty)
IFRS
U.S. dollars
*7.6%
*6.0%
*5.6%
*3.2%
*1.3%
2010†
2011
2012
2013
2014
40
35
30
25
20
15
10
5
0
* Adjusted net operating results %
† Prior Canadian GAAP in Canadian dollars
(in thousands of indicated currency, except per share amounts
and number of employees)
IFRS
In U.S.dollars
Prior Canadian
GAAP
In Canadian dollars
Years Ended
Income statement data
Sales
Gross profit
Gross profit %
Feb 2014
Feb 2013
Feb 2012
Feb 2011
Feb 2010
$ 489,257
131,146
26.8%
$ 500,574
113,899
22.8%
$ 437,135
87,262
20.0%
$ 380,706
101,426
26.6%
$465,945
149,012
32.0%
Administration costs
Income before income taxes
Adjusted net operating results (2)
Adjusted net operating results (2) %
Adjusted net operating results (2) per share
Net earnings (3)
Net earnings (3) %
Net earnings (3) per share (4)
87,143
42,762
29,400
6.0%
1.34
29,400
6.0%
1.34
90,985
12,018
15,769
3.2%
0.72
6,169
1.2%
0.28
83,620
6,097
5,630
1.3%
0.25
7,892
1.8%
0.36
73,597
28,424
21,224
5.6%
0.96
21,224
5.6%
0.96
Statement of financial position data
Net cash (5)
Working capital
Property, plant, and equipment
Total assets
Total debt
Equity
Number of employees
Canada
United States
Europe
Asia
Total
$ 67,761
235,318
96,605
624,154
22,087
359,119
$ 19,787
213,814
90,630
619,774
26,850
328,173
$ 35,376
217,522
72,961
601,970
9,587
335,577
$ 113,024
264,930
64,622
516,037
5,011
337,723
917
188
526
429
2,060
923
182
535
390
2,030
926
178
519
358
1,981
923
178
372
295
1,768
74,635
56,304
35,523
7.6%
1.60
35,523
7.6%
1.60
$103,741
275,928
73,418
512,697
4,002
346,184
911
189
351
289
1,740
(1) Prior Canadian GAAP sales figures converted at average CAD-USD foreign exchange rate for the applicable fiscal year.
(2) This measure is not a measure of performance defined under Prior Canadian GAAP and IFRS. Therefore, it is unlikely to be comparable to similar measures shown
by other companies. However, it is used by management to assess the operating performance of the company. This measure is defined as net income attributable to
Subordinate and Multiple Voting Shares excluding goodwill impairment losses, interest accretion adjustments on on the Velan ABV S.p.A. (“ABV”) purchase price
proceeds payable, positive fair value adjustments to the ABV purchase price proceeds payable, and any unrealized foreign exchange gains or losses on the ABV
purchase price proceeds payable.
(3) Net earnings refers to net income attributable to Subordinate and Multiple Voting Shares.
(4) See note 21 in the Notes to the Consolidated Financial Statements.
(5) This is not a measure of financial condition defined under Prior Canadian GAAP and IFRS. Therefore, it is unlikely to be comparable to similar measures shown by
other companies. However, it is used by management to assess the financial condition of the company. This mesure is defined as cash & cash equivalents plus short-
term investments less bank indebtedness, short-term bank loans and the current portion of long-term bank borrowings.
1
Message to our shareholders and employees
(In U.S. dollars.)
Highlights
• Sales of $489.3 million
• Net earnings(1) of $29.4 million
• Order Backlog of $471.7 million
• Order bookings of $430.2 million
• Net cash(2) of $67.7 million at year end
• Increase dividend payout by 25%
effective June 2014
We are pleased to report improved results. Our net earnings(1)
increased to $29.4 million which is 6% of sales compared to our
adjusted net operating results(3) of $15.8 million or 3.2% of sales
last year.
Sales, order bookings and backlog
Our sales of $489.3 million were 2.3% lower than last year’s
record sales. This year, we had record sales in Canada of $77.3
million which represents 15.8% of global sales. The increase in
sales in Canada reflects growing shipments of our valves to the
Alberta oil and gas industry during the year.
Our sales were diversified by customer, market, and geography as
about 60% of our sales were made outside of North America to
more than 65 countries. China continued to be our largest over-
seas export market even though sales declined from $100 million
last year to $66 million this year mainly due to decreased nuclear
sales following the Fukushima crisis.
Order bookings were $430.2 million which is an increase of
16.3% from last year. Bookings were still lower than sales
and our continuing high backlog of orders for some products
has necessitated quoting longer lead-times than some of our
customers require. In our fourth quarter, we booked $40.5 million
in India from two Indian energy companies. The large orders
to be manufactured in our North American, Italian and Indian
production plants include our Securaseal metal seated ball valves,
Tom Velan, President and Chief Executive Officer (left), with A.K. Velan,
Founder and Executive Chairman of the Board (right).
our forged high pressure pressure seal valves, cast steel gate
valves, and coker ball valves for switch and isolation service. We
continue to be the world leader in supply of coker ball valves.
Despite the 16.3% increase in bookings, our sales exceeded our
bookings by $59.1 million so our backlog of orders declined
11.2% to $471.1 million of which $386.7 million is scheduled
for delivery during our current fiscal year. Every year, our sales
revenues are made of longer term project orders, made-to-order
sales, and book and bill business of commodity valves stocked
in our distribution centers. The percentage of longer term orders
scheduled to ship in more than one year declined from 25% to
18% reflecting a lower nuclear backlog. The portion of the
backlog that is scheduled for shipment within 12 months is 2.9%
lower than last year.
Net earnings(1)
Our net earnings(1) of $29.4 million which is 6% of sales was
much higher than last year’s reported net earnings(1) of $6.2
million or the adjusted net operating results(3) of $15.8 million.
1) Net earnings refer to net income attributable to Subordinate and Multiple Voting Shares.
2) The term “net cash” is defined as cash and cash equivalents plus short-term investments less bank indebtedness, short-term bank loans, and current portion of long-
term bank borrowings. This is not a term of financial condition defined under International Financial Reporting Standards (“IFRS”) and, therefore, it is unlikely to
be comparable to similar measures shown by other companies. However, it is used by management to assess the financial condition of the company.
3) The term “adjusted net operating results” is defined as net income attributable to Subordinate and Multiple Voting Shares excluding the goodwill impairment loss,
the interest accretion adjustments, the positive fair value adjustments to the ABV purchase price proceeds payable, and the unrealized foreign exchange gain on the
ABV purchase price proceeds payable. This is not a term of performance defined under IFRS and, therefore, it is unlikely to be comparable to similar measures
shown by other companies. However, it is used by management to assess the operating performance of the company.
2
Message to our shareholders and employees
We had improved margins in our North American operations
as well as most of our foreign operations including Velan ABV
S.p.A. (“ABV”), which was profitable for the first time since the
acquisition in 2011.
Our results benefitted from favourable currency changes as the
U.S. dollar increased on average by 4.8% against the Canadian
dollar and fell 3.3% against the Euro. The changes mean that
all the costs denominated in Canadian dollars were a lower
percentage of our U.S. dollar selling prices and we consolidated
higher net earnings(1) from our European operations which report
in Euro. Another positive factor in the improved earnings was
that our costs related to asbestos lawsuits were $5.5 million,
compared to $8.8 million last year. Our gross profit improved
four percentage points to 26.8%.
Pressure seal valve assembly in Velan’s Chinese operations.
The Indian plant completed its first year of production and during
the year booked $15.6 million dollars of orders including $8.9
million for supply to the Indian market. In our China plant, we
started production of cast pressure seal valves for the China
market.
A coker switch valve installed in an oil refinery in Russia.
Investments in our global manufacturing infrastructure
During the last two years, we invested $46.5 million in our
global manufacturing infrastructure with an aim to improve
efficiency, increase our global presence, and improve our
cost competitiveness. This included investments in our North
American production plants, a new Greenfield plant in India as
well as expanded production ranges in our Chinese and Korean
operations.
Performance testing of a 24" cast steel valve in Velan’s Indian
operations.
3
Message to our shareholders and employees
Financial Strength
This year we strengthened our balance sheet as net cash(2) increased
by $47.9 million to reach $67.7 million or $3.08 per share and
equity increased by $30.9 million to reach $359.1 million or
$16.35 per share. Cash provided by operating activities for the
current fiscal year was $75.5 million compared to $14.4 million
last year. The $61.1 million increase was principally related to
improved net earnings(1) and a decrease in inventory.
Outlook
We are pleased to report improved earnings despite slightly lower
sales than last year. We start the new fiscal year with an order
backlog of $471.1 million. Our global reach, market diversity, and
broad range of valves provide us with many sales opportunities
around the world that our sales teams are pursuing. We have
expanded and strengthened our local manufacturing presence in
Asia with an objective to improve our cost competitiveness and
increase local sales in Korea, China and India.
We are now 2,060 people working together in 14 countries to
design, manufacture and sell superior quality valves to the global
market. Our mission is “To be the world’s leading valve brand”
and we would like to thank all our devoted employees who have
contributed their energy and expertise to advance our mission
and improve our operating results. We look to the future with a
good understanding of the challenges involved in competing on
the world market and with confidence that we can continue to
successfully build the value of our company for the benefit of all
stakeholders.
Members of the Velan team from Plant 4 in Granby, Quebec,
who helped supply valves to a naphtha cracker plant project
in the Philippines. For this project, Velan designed and
manufactured the largest pneumatic-actuated Class 300 gate
valves it has ever produced—up to 24".
A.K. Velan
Founder and Executive Chairman of the Board
T. C. Velan
President and Chief Executive Officer
4
Management’s discussion and analysis
May 20, 2014
The following discussion provides an analysis of the consolidated operating results and financial position of Velan Inc. (“the
Company”) for the year ended February 28, 2014. This Management’s Discussion and Analysis (“MD&A”) should be read in
conjunction with the Company’s audited consolidated financial statements for the years ended February 28, 2014 and 2013. The
Company’s consolidated financial statements have been prepared in accordance with International Financial Reporting Standards
(“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The significant accounting policies upon which these
consolidated financial statements have been prepared are detailed in Note 2 of the Company’s audited consolidated financial
statements. All foreign currency transactions, balances and overseas operations have been converted to U.S. dollars, the Company’s
reporting currency. Selected annual information for the three most recently completed reporting periods and a summary of quarterly
results for each of the eight most recently completed quarters is included further in this report. Additional information relating to the
Company, including the Annual Information Form and Proxy Information Circular, can be found on SEDAR at www.sedar.com.
BASIS OF PRESENTATION AND ANALYSIS
In this MD&A, the Company has presented measures of performance or financial condition which are not defined under IFRS
(“non-IFRS measures”) and are, therefore, unlikely to be comparable to similar measures presented by other companies. These
measures are used by management in assessing the operating results and financial condition of the Company and are reconciled with
the performance measures defined under IFRS. Reconciliations of these amounts can be found at the end of this report.
FORWARD-LOOKING INFORMATION
This MD&A may include forward-looking statements, all of which are subject to risks and uncertainties. These risks and
uncertainties are disclosed in the Company’s filings with the appropriate securities commissions and include among other matters,
risks related to foreign exchange, raw material pricing, tax matters, foreign investment and operations as well as contingent
liabilities. No forward-looking statement can be guaranteed and actual future results may differ materially from those expressed
herein. The Company disclaims any responsibility to update or revise these forward-looking statements except as required by the
applicable securities laws.
OVERVIEW
The Company designs, manufactures and markets on a worldwide basis a broad range of industrial valves for use in most industry
applications including power generation, oil and gas, refining and petrochemicals, chemical, LNG and cryogenics, pulp and paper,
geothermal processes and shipbuilding. The Company is a world leader in steel industrial valves operating 17 manufacturing plants
worldwide with 2,060 employees. The Company’s head office is located in Montreal, Canada. The Company’s business strategy is
to design, manufacture, and market new and innovative valves with emphasis on quality, safety, ease of operation, and long service
life. The Company’s strategic goals include, but are not limited to, increasing market share in power markets, investing in talent
development of high-potential employees, adding talent where necessary, providing high customer service, enhancing manufacturing
and/or sales capabilities in emerging markets such as Brazil, Russia, India and China, and continually improving operational
excellence.
The consolidated financial statements of the Company include the North American operations comprising four manufacturing plants
and one distribution facility in Canada, as well as one manufacturing plant and three distribution facilities in the U.S. Significant
overseas operations include manufacturing plants in France, Italy, Portugal, U.K., Korea, Taiwan, India, and China. The Company’s
operations also include a distribution facility in Germany and a 50%-owned Korean foundry.
5
Management’s discussion and analysis
CONSOLIDATED HIGHLIGHTS1
(millions, excluding per share amounts)
Consolidated statements of earnings
Sales
Gross profit
Gross profit %
Net earnings2
Net earnings2 %
Earnings per share – basic
– diluted
Weighted average shares outstanding
Consolidated statements of cash flows
Cash provided by operating activities
Cash provided (used) by investing activities
Cash provided (used) by financing activities
Demand data
Net new orders received
Period ending backlog of orders
Fiscal year
ended
February 28,
2014
Fiscal year
ended
February 28,
2013
Increase
(decrease)
%
Increase
(decrease)
$489.3
131.1
26.8%
29.4
6.0%
1.34
1.34
22.0
75.5
(17.8)
(15.6)
430.2
471.7
$500.6
113.9
22.8%
6.2
1.2%
0.28
0.28
22.0
14.4
(23.9)
4.8
370.1
531.0
$(11.3)
17.2
(2.3)%
15.1%
23.2
374.2%
1.06
1.06
61.1
6.1
378.6%
378.6%
424.3%
25.5%
(20.4)
(425.0)%
60.1
(59.3)
16.2%
(11.2)%
1 All dollar amounts in this schedule are denominated in U.S. dollars.
2 Net earnings refers to net income attributable to Subordinate and Multiple Voting Shares.
6
Management’s discussion and analysis
Highlights of fiscal 2014 as well as factors that may impact fiscal 2015
(unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the prior fiscal year)
Net earnings1 amounted to $29.4 million or $1.34 per share compared to $6.2 million or $0.28 per share last year. The
$23.2 million increase in net earnings1 is primarily attributable to improved gross profit margins and lower administration
costs. Furthermore, net earnings1 for the prior year were significantly impacted by an $11.7 million non-cash goodwill
impairment charge related to the Company’s then 70%-owned Italian subsidiary, Velan ABV S.p.A. (“ABV”). Excluding
this charge, as well as other non-recurring items related to the ABV acquisition, the Company’s adjusted net operating
results2 would have been $29.4 million or $1.34 per share this year compared to $15.8 million or $0.72 per share last year.
Sales amounted to $489.3 million, a decrease of $11.3 million or 2.3% from the record total achieved in the prior year.
This decrease is primarily attributable to a decrease in nuclear sales following the Fukushima crisis which was partially
offset by an increase in sales in Canada to the Alberta oil and gas industry.
Net new orders received (“bookings”) amounted to $430.2 million, an increase of $60.1 million or 16.2% compared to last
year. This increase is primarily attributable to significant new orders booked with large Indian energy customers. Since
sales outpaced bookings, the Company ended the current year with a backlog of $471.7 million, a decrease of $59.3 million
or 11.2% from the end of the prior year.
Gross profit percentage increased by 4.0 percentage points from 22.8% to 26.8%. This increase is mainly attributable to a
higher margin product mix, particularly spare part sales, and improved efficiencies.
The Company generated net cash2 from operations of $75.5 million. This source of net cash2 is primarily attributable to
improved net earnings1 and a decrease in inventory. The Company ended the year with net cash2 of $67.7 million, an
increase of $47.9 million or 241.9% since the beginning of the current fiscal year.
On May 20, 2014, the Board of Directors approved an increase of its annual dividend payout from CDN$0.32 per share to
CDN$0.40 per share. This increase will be effective with the next quarterly dividend payment of CDN$0.10 payable on
June 30, 2014, to all shareholders of record as at June 16, 2014.
Foreign currency impacts:
o Based on average exchange rates, the Euro strengthened 3.4% against the U.S. dollar when compared to the same
period last year. This strengthening resulted in the Company’s net profits from its European subsidiaries being
reported as higher U.S. dollar amounts in the current fiscal year.
o Based on average exchange rates, the Canadian dollar weakened 4.6% against the U.S. dollar when compared to
the same period last year. This weakening resulted in the Company’s Canadian dollar expenses being reported as
lower U.S. dollar amounts in the current fiscal year.
o The impact of these currency swings was favourable to the Company’s results for the current fiscal year.
The Company’s margins and operational profitability improved over the course of the current year. This was due to a combination
of factors including improved gross profit margins and lower administration costs. The improvement in gross profit was mainly
attributable to a higher margin product mix and improved efficiencies. Despite a drop from the record sales level achieved in the
prior year, the Company realized a higher proportion of spare part sales which generate higher margins than manufactured valves.
The decrease in administration costs is mainly attributable to decreases in sales commissions and costs associated with the
Company’s ongoing asbestos litigation (see Contingencies section). Like many other U.S. valve manufacturers, two of the
Company’s U.S. subsidiaries have been named as defendants in a number of pending lawsuits brought on behalf of individuals
seeking to recover damages for their alleged asbestos exposure. These lawsuits are related to products manufactured and sold in the
past. Management believes that any asbestos was incorporated entirely within the product in such a way that it would not allow for
any ambient asbestos during normal operation, inspection or repairs. Management strongly believes its products, which were
supplied in accordance with valve industry practice and customer mandated specifications, did not contribute to any asbestos-related
illness. The Company will continue to vigorously defend against these claims but, given the ongoing course of asbestos litigation in
the U.S. and the unpredictability of jury trials, it is not possible to make an estimate of any legal or related costs. Settlement costs
and legal fees decreased from $8.8 million in fiscal year 2013 to $5.5 million in fiscal year 2014. The fluctuation in asbestos costs is
1 Net earnings refers to net income attributable to Subordinate and Multiple Voting Shares.
2 Non-IFRS measures – see reconciliations at the end of this report.
7
Management’s discussion and analysis
due more to the timing of settlement payments than to changes in long-term trends. All of the above factors as well as favourable
currency swings contributed to an 86.1% increase in the Company’s adjusted net operating results1.
Goodwill impairment analysis and acquisition of non-controlling interest
On an annual basis, the Company is required to perform an impairment test on goodwill acquired in a business combination. At the
end of the prior fiscal year, the Company determined that the carrying amount of the goodwill associated with ABV exceeded its
recoverable amount and, accordingly, the Company recorded a non-cash goodwill impairment loss of $11.7 million. This
impairment charge was the result of actual results of ABV coming in below the expectations at the time of the acquisition. The
reasons for these lower achieved results were due to a variety of factors, including a business process integration that proved to be
more difficult than planned, as well as profitability issues related to the complexity of the manufactured products. In addition, the
increasingly competitive landscape of the last two years, particularly amongst upstream oil and gas flow control manufacturers in
Italy, negatively impacted margins.
In the second quarter of the current fiscal year, ABV was required to recapitalize its share structure as a result of losses sustained in
prior periods. Through the recapitalization, the existing share capital of ABV was cancelled. New shares were issued solely to the
Company through the conversion of existing shareholder loans from the Company to ABV. In addition, the existing shareholder
loans payable to the non-controlling interest of ABV amounting to $1.4 million (€1.1 million) were repaid through the
recapitalization process. As a result of the recapitalization, the Company acquired the remaining 30% of ABV to become its 100%
shareholder as of July 16, 2013. Management considered this recapitalization to be a triggering event to test the carrying value of
the ABV assets for impairment. The recoverable amount was determined based on the fair value less costs to sell approach using a
discounted cash flow model. Although the business process integration was still underway, the Company did not believe that the
long-term outlook for the business had changed. As a result, no goodwill impairment loss was recognized following the impairment
test performed in the second quarter of the current fiscal year.
In addition to the above impairment test triggered on July 16, 2013, the Company continued to carry out its annual impairment
testing at its year-end date. In the context of its annual impairment testing at year-end, the Company completed its impairment
analysis and assessed the recoverability of the assets allocated to ABV. The Company calculated the recoverable amounts of ABV
using valuation methods which were consistent with those used in prior years. As a result of the impairment analysis, the Company
determined that the recoverable amount exceeded the carrying amount of the goodwill associated with ABV and, accordingly, no
goodwill impairment loss was recorded at February 28, 2014.
The Company continues to view the acquisition of ABV as a great opportunity to grow its sales and earnings over the coming years
and is working with the local management of ABV to help improve operations, as well as increase output and profitability. ABV
reported positive net earnings2 for the first time since its acquisition in the current fiscal year.
Factors that may impact fiscal year 2015
The challenge facing the Company for fiscal year 2015 will be to capitalize on the significant investments it has made over the last
two years to improve its productive efficiency as well as its global manufacturing capacity and presence. The Company continues to
work to improve its operational excellence through lean, global sourcing, working capital management and cost controls. These
initiatives have had a positive impact on current year results.
Despite the increase in bookings for the current fiscal year, the Company’s backlog declined by 11.2% over the course of the year as
sales outpaced bookings for the second consecutive year. During the prior fiscal year, the Company instituted a policy of quoting
longer lead times in order to reduce its very large order backlog to ease pressure on production. Since this strategy accomplished its
purpose of reducing the order backlog to more normalized levels over the course of the prior year, the Company began quoting
standard lead times in the current year, resulting in higher net bookings, especially in the latter half of the year. The Company
believes that the global demand for its products is strong and is working to increase bookings in future years. However, there can be
no assurance that outside economic and geopolitical factors will not materially adversely affect the Company’s results of operations
or financial condition.
1 Non-IFRS measures – see reconciliations at the end of this report.
2 Net earnings refers to net income attributable to Subordinate and Multiple Voting Shares.
8
Management’s discussion and analysis
SUMMARY OF RESULTS
Summary financial data derived from the Company’s financial statements prepared in accordance with IFRS for the three most
recently completed reporting periods are as follows:
For the reporting periods ended on the following dates
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Fiscal year ended
February 28, 2014
Fiscal year ended
February 28, 2013
Fiscal year ended
February 29, 2012
Operating Data
Sales
Net Earnings1
Earnings per Share
- Basic
- Diluted
Balance Sheet Data
Total Assets
Total Long-term financial liabilities
Shareholder Data
Cash dividends per share
- Multiple Voting Shares2
- Subordinate Voting Shares
Outstanding Shares at report date
- Multiple Voting Shares2
- Subordinate Voting Shares
$500,574
6,169
0.28
0.28
619,774
24,393
0.32
0.32
$437,135
7,892
0.36
0.36
601,970
17,109
0.32
0.32
$489,257
29,400
1.34
1.34
624,154
19,992
0.31
0.31
15,566,567
6,392,201
Sales for fiscal year 2014 decreased by $11.3 million or 2.3%, compared to fiscal year 2013. This decrease is primarily attributable
to a decrease in nuclear sales following the Fukushima crisis which was partially offset by an increase in sales in Canada to the
Alberta oil and gas industry. Sales reached a record level for fiscal year 2013, increasing by $63.5 million or 14.5% compared to
fiscal year 2012. The increase was due to the Company increasing its sales volume due to improved production execution on large
export project orders.
Gross profit for fiscal year 2014 amounted to $131.1 million, an increase of $17.2 million from fiscal year 2013. Gross profit
percentage for fiscal year 2014 also increased from the 22.8% reported in fiscal year 2013 to 26.8%. The increase in gross profit
percentage reported for fiscal year 2014 is mainly attributable to a higher margin product mix, particularly spare part sales, and
improved efficiencies. Gross profit for fiscal year 2013 amounted to $113.9 million, an increase of $26.6 million from fiscal year
2012. Gross profit percentage for fiscal year 2013 also increased from the 20.0% reported in fiscal year 2012 to 22.8%. The increase
in gross profit percentage reported for fiscal year 2013 is attributable to a combination of sales mix, as well as the fixed cost
component of cost of sales as compared to the increased sales in the year.
Administration costs for fiscal year 2014 decreased by $3.9 million when compared to fiscal year 2013. This decrease was mainly
attributable to decreases in sales commissions and costs associated with the Company’s ongoing asbestos litigation (see
Contingencies section). The fluctuation in asbestos costs is due more to the timing of settlement payments than to changes in long-
term trends. Administration costs for fiscal year 2013 increased by $7.4 million when compared to fiscal year 2012. Such increase
was principally due to an increase in sales commissions on international export orders, an increase in freight costs for the increased
customer shipments and an increase in costs associated with the Company’s ongoing asbestos litigation (see Contingencies section).
The fiscal year 2013 net earnings1 were also negatively impacted by an $11.7 million non-cash goodwill impairment loss related to
the ABV cash-generating unit.
1 Net earnings refers to net income attributable to Subordinate and Multiple Voting Shares.
2 Multiple Voting Shares (five votes per share) are convertible into Subordinate Voting Shares on a 1 to 1 basis.
9
Management’s discussion and analysis
RESULTS OF OPERATIONS – for the year ended February 28, 2014 compared to the year ended February 28, 2013
(unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the prior fiscal year)
Sales
Year ended
February 28,
2014
Year ended
February 28,
2013
(millions)
Sales
$489.3
$500.6
Sales decreased by $11.3 million or 2.3% from the record total achieved in the prior year. The decrease in sales is primarily
attributable to a decrease in sales in the Company’s French operations which was partially offset by an increase in sales in its North
American operations. For the French operations, the decrease in sales is primarily attributable to a decrease in nuclear sales
following the Fukushima nuclear disaster in Japan. For the North American operations, the increase in sales is due primarily to an
increase in sales in Canada to the Alberta oil and gas industry.
Net bookings and backlog
(millions)
Year ended
February 28,
2014
Year ended
February 28,
2013
Net bookings
$430.2
$370.1
Net bookings increased by $60.1 million or 16.2% for the fiscal year. During the prior fiscal year, the Company instituted a policy of
quoting longer lead times in order to reduce its very large order backlog to ease pressure on production. Since this strategy
accomplished its purpose of reducing the order backlog to more normalized levels over the course of the prior year, the Company
began quoting standard lead times in the current year, resulting in higher net bookings. The increase in net bookings was realized
primarily in the latter half of the year when the Company booked over $40 million worth of orders with two large Indian energy
customers.
(millions)
Backlog
February
2014
February
2013
February
2012
$471.7
$531.0
$661.8
For delivery within the subsequent fiscal year
$386.7
$398.2
$460.5
For delivery beyond the subsequent fiscal year
$85.0
$132.8
$201.3
Percentage – beyond the subsequent fiscal year
18.0%
25.0%
30.4%
The Company’s book-to-bill ratio was 0.88 which resulted in a $59.3 million or 11.2% decrease in backlog since the beginning of
the fiscal year. The Company ended the year with a backlog of $471.7 million.
Gross profit
(millions)
Year ended
February 28,
2014
Year ended
February 28,
2013
Gross profit
$131.1
$113.9
Gross profit percentage
26.8%
22.8%
Gross profit increased by $17.2 million for the fiscal year, an increase of 4.0 percentage points in the gross profit percentage from
the prior year. This increase is primarily attributable to a higher margin product mix, particularly as a result of a higher proportion of
spare parts sales which generally generate higher gross profit as a percentage of sales when compared to manufactured valves.
10
Management’s discussion and analysis
Administration costs
(millions)
Year ended
February 28,
2014
Year ended
February 28,
2013
Administration costs
$87.1
$91.0
As a percentage of sales
17.8%
18.2%
Administration costs decreased by $3.9 million or 4.3% for the fiscal year. The decrease is mainly a result of decreases in sales
commissions and costs associated with the Company’s ongoing asbestos litigation (see Contingencies section). The fluctuation in
asbestos costs for the fiscal year is due more to the timing of settlement payments in these two periods rather than to changes in
long-term trends. Like many other U.S. valve manufacturers, two of the Company’s U.S. subsidiaries have been named as
defendants in a number of pending lawsuits brought on behalf of individuals seeking to recover damages for their alleged asbestos
exposure. These lawsuits are related to products manufactured and sold in the past. Management believes that any asbestos was
incorporated entirely within the product in such a way that it would not allow for any ambient asbestos during normal operation,
inspection or repairs. Management strongly believes its products, which were supplied in accordance with valve industry practice
and customer mandated specifications, did not contribute to any asbestos-related illness. The Company will continue to vigorously
defend against these claims but given the ongoing course of asbestos litigation in the U.S. and the unpredictability of jury trials, it is
not possible to make an estimate of any settlement costs and legal fees.
Goodwill impairment loss and other income
(millions)
Year ended
February 28,
2014
Year ended
February 28,
2013
Goodwill impairment loss
$ -
Other income
$0.3
$11.7
$3.4
As a result of the annual goodwill impairment test required under IFRS, the Company recorded an impairment charge of $11.7
million in the prior fiscal year related to its ABV cash-generating unit. For the current fiscal year, the Company performed two
goodwill impairment tests with respect to ABV, one in the second quarter of the year when a triggering event occurred following the
acquisition of the 30% non-controlling interest in ABV by the Company, and one at year-end as part of the annual goodwill
impairment test required under IFRS. As a result of these tests, no goodwill impairment loss was recorded in the current fiscal year.
See Highlights section above for more details.
The other income of $3.4 million for the prior year consists primarily of a $2.4 million fair value adjustment on the contingent
payments related to the ABV acquisition and a $0.4 million unrealized foreign exchange gain on the remaining proceeds payable on
the ABV acquisition. During the first quarter of the prior year, the Company signed an agreement with the previous owners of ABV
extending the required disbursement date of the €1.5 million contingent payment to be paid in the event that ABV had satisfied
certain non-financial criteria from July 29, 2012 to March 15, 2013. In addition, the requirement that ABV satisfy the non-financial
criteria was removed. As a result, the Company recorded a $0.2 million fair value adjustment on the contingent payment to other
income. In the fourth quarter of the prior year, the Company evaluated the likelihood that the financial criteria related to the second
of two €2 million contingent payments to be paid upon ABV satisfying certain earnings before interest, taxes, depreciation and
amortization (“EBITDA”) targets would be met. Based on this evaluation, the Company determined that it would be more likely
than not that such financial criteria would not be satisfied. As a result, the Company recorded an additional fair value adjustment
with respect to the applicable contingent payment of $2.2 million to other income in the prior year.
11
Management’s discussion and analysis
Net finance costs
(millions)
Year ended
February 28,
2014
Year ended
February 28,
2013
Net finance costs
$1.5
$2.6
The decrease in net finance costs relates primarily to the decrease in long-term debt and short-term borrowings discussed in the
Liquidity and Capital Resources section below.
Income taxes
(in thousands, excluding percentages)
Year ended
February 28,
2014
%
$
Year ended
February 28,
2013
%
$
Income before income taxes
42,762
100.0
12,018
100.0
Tax calculated at domestic tax rates applicable to earnings in the respective countries
12,528
29.3
4,277
35.6
(4)
-
-
(1,308)
544
0.0
-
-
(3.1)
1.3
(314)
3,147
(657)
(1,178)
9
(2.6)
26.2
(5.5)
(9.8)
0.1
11,759
27.5
5,284
44.0
Tax effects of:
Non-deductible (taxable) foreign exchange loss (gain)
Non-deductible goodwill impairment loss
Non-taxable income on fair value adjustment of proceeds payable
Benefit attributable to a financing structure
Other
Provision for income taxes
Net earnings1
(millions)
Net earnings1
As a percentage of sales
Adjusted net operating results2
As a percentage of sales
Year ended
February 28,
2014
Year ended
February 28,
2013
$29.4
6.0%
$29.4
6.0%
$6.2
1.2%
$15.8
3.2%
In order to adequately compare the operations with the prior year, the Company normalized its net earnings1 by calculating the
adjusted net operating results2 for the two years in question. Adjusted net operating results2 amounted to $29.4 million or $1.34 per
share for the current fiscal year compared to $15.8 million or $0.72 per share achieved in the prior fiscal year. As a percentage of
sales, the adjusted net operating results2 margin was 6.0% for the current year, compared to 3.2% for the prior year. As discussed in
the sections above, this increase is due primarily to improved gross profit margins and lower administration costs.
1 Net earnings refers to net income attributable to Subordinate and Multiple Voting Shares.
2 Non-IFRS measures – see reconciliations at the end of this report.
12
Management’s discussion and analysis
SUMMARY OF QUARTERLY RESULTS
Summary financial data derived from the Company’s unaudited financial statements from each of the eight most recently completed
quarters are as follows:
For the quarters in months ending May, August, November and February
(in thousands of U.S. dollars, excluding per share amounts)
February
2014
$120,716
10,392
November
2013
$115,611
8,319
August
2013
$120,762
4,889
May
2013
$132,168
5,800
February
2013
$142,070
(3,555)
November
2012
$134,203
5,712
QUARTERS ENDED
May
2012
$115,852
694
August
2012
$108,449
3,318
0.47
0.47
0.38
0.38
0.23
0.23
0.26
0.26
(0.16)
(0.16)
0.26
0.26
0.15
0.15
0.03
0.03
Sales
Net Earnings (loss) 1
Earnings (Loss) per share
- Basic
- Diluted
In the quarters ended August 2012 and May 2012, sales remained fairly constant with prior years. Sales can vary from one quarter to
the next due to the timing of the shipment of project orders. Sales were higher in August 2013, May 2013, February 2013 and
November 2012 as the Company improved its production execution on large export project orders. As a result, sales for the quarters
ended November 2013 and February 2014 returned to historical levels. A net loss1 was recorded in the quarter ended February 2013
due to a goodwill impairment loss. Net earnings1 for the quarters ended November 2013 and February 2014 were higher due to a
more efficient product mix and lower administration costs.
RESULTS OF OPERATIONS – quarter ended February 28, 2014 compared to the quarter ended February 28, 2013
(unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to the fourth quarter of the last fiscal year)
Sales
(millions)
Three-month
period ended
February 28,
2014
Three-month
period ended
February 28,
2013
Sales
$120.7
$142.1
Sales decreased by $21.4 million or 15.1% for the quarter. This decrease is primarily attributable to the Company’s French
operations which realized lower nuclear sales following the Fukushima nuclear disaster in Japan. This reduction in nuclear sales was
partially offset by an increase in sales of spare parts. Furthermore, as the Company’s production cycle has normalized over the last
fiscal year following the shipment of large export project orders in the prior year quarter, the sales for the current quarter returned to
historical levels, which further explains the quarterly drop in sales.
Net bookings and backlog
Three-month
period ended
February 28,
2014
Three-month
period ended
February 28,
2013
(millions)
Net bookings
$142.4
$96.7
Bookings increased by $45.7 million or 47.3% for the quarter. The increase in net bookings is primarily attributable to over $40
million worth of orders that were booked in the quarter with two large Indian energy customers. The large orders, which will be
manufactured in the Company’s North American, Italian and Indian production plants, include the Company’s Securaseal metal
seated ball valves, its forged pressure seal valves, its cast steel gate valves, and its coker ball valves for switch and isolation service.
The Company continues to be the world leader in the supply of coker ball valves.
1 Net earnings or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
13
Management’s discussion and analysis
Gross profit
(millions)
Three-month
period ended
February 28,
2014
Three-month
period ended
February 28,
2013
Gross profit
$36.6
$30.4
Gross profit percentage
30.3%
21.4%
Gross profit increased by $6.2 million for the quarter, an increase of 8.9 percentage points in the gross profit percentage from the
prior year. This increase is primarily attributable to a higher margin product mix, particularly as a result of a higher proportion of
spare parts sales which generally generate higher gross profit as a percentage of sales when compared to manufactured valves.
Administration costs
(millions)
Three-month
period ended
February 28,
2014
Three-month
period ended
February 28,
2013
Administration costs
$22.1
$22.4
As a percentage of sales
18.3%
15.8%
Administration costs for the quarter remained relatively stable when compared to the prior year quarter.
Goodwill impairment loss and other income
(millions)
Three-month
period ended
February 28,
2014
Three-month
period ended
February 28,
2013
Goodwill impairment loss
$ -
Other income
$1.3
$11.7
$2.6
As a result of the annual goodwill impairment test required under IFRS, the Company recorded an impairment charge of $11.7
million in the prior fiscal year’s fourth quarter related to its ABV cash-generating unit. No goodwill impairment loss was recorded
in the current fiscal year’s quarter as a result of the current year’s impairment test. See Highlights section above for more details.
In the prior year’s fourth quarter, a $2.2 million fair value adjustment on the contingent payments related to the ABV acquisition
was recorded. At that time, the Company evaluated the likelihood that the financial criteria related to the second of two €2 million
contingent payments to be paid upon ABV satisfying certain EBITDA targets would be met. Based on this evaluation, the Company
determined that it would be more likely than not that such financial criteria would not be satisfied. As a result, the Company
recorded a fair value adjustment with respect to the applicable contingent payment of $2.2 million to other income in the prior year.
There remains no amount of proceeds payable with respect to the ABV acquisition at the end of the current fiscal year.
14
Management’s discussion and analysis
Finance costs
(millions)
Three-month
period ended
February 28,
2014
Three-month
period ended
February 28,
2013
Net finance costs
$0.4
$0.5
Net finance costs for the quarter remained relatively stable when compared to the prior year quarter.
Income taxes
(in thousands, excluding percentages)
Three-month period
ended February 28, 2014
%
$
Three-month period
ended February 28, 2013
%
$
Income (Loss) before income taxes
15,387
100.0
(1,552)
100.0
Tax calculated at domestic tax rates applicable to earnings in the respective countries
4,918
32.0
(151)
9.7
(83)
-
-
(329)
227
(0.5)
-
-
(2.1)
1.4
-
3,147
(604)
(308)
(117)
-
(202.8)
38.9
19.9
7.6
4,733
30.8
1,967
(126.7)
Tax effects of:
Non-deductible (taxable) foreign exchange loss (gain)
Non-deductible goodwill impairment loss
Non-taxable income on fair value adjustment of proceeds payable
Benefit attributable to a financing structure
Other
Provision for income taxes
Net earnings1
(millions)
Net earnings (loss)1
As a percentage of sales
Adjusted net operating results2
As a percentage of sales
Three-month
period ended
February 28,
2014
Three-month
period ended
February 28,
2013
$10.4
8.6%
$10.4
8.6%
$(3.6)
(2.5)%
$6.1
4.3%
In order to adequately compare the operations with the prior year quarter, the Company normalized its net earnings1 by calculating
the adjusted net operating results2 for the two quarters in question. Adjusted net operating results2 amounted to $10.4 million or
$0.47 per share for the current quarter compared to $6.1 million or $0.28 per share achieved in the prior year period. As a
percentage of sales, the adjusted net operating results2 margin was 8.6% for the current quarter, compared to 4.3% for the prior year
period. As discussed in the sections above, this increase is due primarily to improved gross profit margins.
1 Net earnings or loss refers to net income or loss attributable to Subordinate and Multiple Voting Shares.
2 Non-IFRS measures – see reconciliations at the end of this report.
15
Management’s discussion and analysis
LIQUIDITY AND CAPITAL RESOURCES – a discussion of liquidity risk, credit facilities, cash flows and
proposed transactions (unless otherwise noted, all dollar amounts are denominated in U.S. dollars)
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due. The Company
manages its liquidity risk by continually monitoring its future cash requirements. Cash flow forecasting is performed in the operating
entities and aggregated by the Company’s corporate finance team. The Company’s policy is to maintain sufficient cash and cash
equivalents and available credit facilities in order to meet its present and future operational needs.
The following table presents the Company’s financial obligations identified by type and future contractual dates of payment:
(In thousands)
Long-term debt
Accounts payable and accrued
liabilities
Customer deposits
Accrual for performance guarantees
Bank indebtedness and short-term
bank loans
Derivative liabilities
Total
$
22,087
76,590
66,842
33,842
32,792
1,501
Less than
1 year
$
10,402
76,590
66,842
33,842
32,792
1,501
As at February 28, 2014
4 to 5
Years
$
After
5 years
$
739
1,959
-
-
-
-
-
-
-
-
-
-
1 to 3
Years
$
8,987
-
-
-
-
-
On February 28, 2014, the Company’s order backlog was $471.7 million and its net cash1 plus unused credit facilities amounted to
$173.1 million, which it believes, along with future cash flows generated from operations, is sufficient to meet its financial
obligations, increase its capacity, satisfy its working capital requirements, and execute on its business strategy. However, there can
be no assurance that the risk of another sharp downturn in the economy will not materially adversely affect the Company’s results of
operations or financial condition. The Company continues to closely monitor the continued weakness of the euro currency. The
Company is in compliance with all covenants related to its debt and credit facilities.
As a corollary to the managing its liquidity risk the Company also monitors the financial health of its key suppliers.
Proposed transactions
The Company has not committed to any material asset or business acquisitions or dispositions, other than those already discussed in
this MD&A.
1 Non-IFRS measures – see reconciliations at the end of this report.
16
Management’s discussion and analysis
Cash flows (unless otherwise noted, all amounts are in U.S. dollars and all comparisons are to same period in the prior fiscal year)
Net cash1
(millions)
Net cash1
February
2014
November
2013
February
2013
November
2012
February
2012
$67.7
$59.2
$19.8
$5.5
$35.4
The Company’s net cash1 increased by $8.5 million during the quarter and $47.9 million since the beginning of the year. For both
periods, net cash1 was positively impacted by improved net earnings2 and positive non-cash working capital movements.
Cash provided by operating activities
(millions)
Fiscal Year
ended
February 28,
2014
Fiscal Year
ended
February 28,
2013
Three-month
period ended
February 28,
2014
Three-month
period ended
February 28,
2013
Cash provided by operating activities
$75.5
$14.4
$13.4
$23.1
Cash provided by operating activities for the current fiscal year increased by $61.1 million when compared to last year. This increase
was principally related to improved net earnings2 and a decrease in inventory. Cash provided by operating activities for the quarter
decreased by $9.7 million when compared to the prior year period. This decrease was principally related to non-cash working capital
movements, specifically a decrease in customer deposits.
Accounts receivable
(millions)
Fiscal Year
ended
February 28,
2014
Fiscal Year
ended
February 28,
2013
Three-month
period ended
February 28,
2014
Three-month
period ended
February 28,
2013
Accounts receivable decrease (increase)
$5.4
$(23.3)
$(2.0)
$(2.2)
Accounts receivable balances are a function of the timing of sales and cash collections. For both the current quarter and fiscal year,
the fluctuation in the accounts receivable balance is a function of the timing of payments received on large overseas project
accounts, particularly related to the collection period for the Company’s nuclear orders in China, as well as a decrease in sales over
the current quarter.
Inventory
(millions)
Inventory decrease
Customer deposits decrease
Fiscal Year
ended
February 28,
2014
Fiscal Year
ended
February 28,
2013
Three-month
period ended
February 28,
2014
Three-month
period ended
February 28,
2013
$23.0
$9.8
$11.3
$10.2
$0.5
$7.0
$17.7
$8.4
Inventory typically increases in times of rising backlog and order bookings and decreases when the opposite occurs. Inventory is
also a function of timing between receipts and shipments. For the current quarter, inventory remained relatively flat while, for the
fiscal year, it decreased as a result of the decrease in backlog during the corresponding period. In order to help finance its investment
in inventory, the Company, where possible, obtains customer deposits for large orders. The decrease in customer deposits for the
fiscal year is in line with the lower backlog and decreased inventory.
1 Non-IFRS measures – see reconciliations at the end of this report.
2 Net earnings refers to net income attributable to Subordinate and Multiple Voting Shares.
17
Management’s discussion and analysis
Accounts payable and accrued liabilities
(millions)
Fiscal Year
ended
February 28,
2014
Fiscal Year
ended
February 28,
2013
Three-month
period ended
February 28,
2014
Three-month
period ended
February 28,
2013
Accounts payable and accrued liabilities (decrease) increase
$(1.8)
$(3.8)
$4.1
$0.1
For all of the indicated periods, the fluctuations in accounts payable and accrued liabilities were primarily related to timing,
particularly related to inventory.
Additions to property, plant and equipment
(millions)
Fiscal Year
ended
February 28,
2014
Fiscal Year
ended
February 28,
2013
Three-month
period ended
February 28,
2014
Three-month
period ended
February 28,
2013
Additions to property, plant and equipment
$18.0
$28.5
$3.3
$5.8
The additions to property, plant and equipment relate mainly to the Company’s North American and Asian operations where it
continues to invest in machinery and equipment in order to improve its manufacturing infrastructure and operational efficiency.
Dividends
(millions)
Dividends paid
Fiscal Year
ended
February 28,
2014
Fiscal Year
ended
February 28,
2013
Three-month
period ended
February 28,
2014
Three-month
period ended
February 28,
2013
$6.8
$7.1
$1.7
$1.8
During the current fiscal year, the Company maintained its dividend policy of CDN$0.32 per share, payable quarterly. In the next
fiscal year, the Company will raise its annual dividend payout to CDN$0.40 per share. This change will apply beginning with the
next quarterly dividend payment payable on June 30, 2014, to all shareholders of record as at June 16, 2014.
Long-term debt
(millions)
Increase in long-term debt
Repayment of long-term debt
Fiscal Year
ended
February 28,
2014
Fiscal Year
ended
February 28,
2013
Three-month
period ended
February 28,
2014
Three-month
period ended
February 28,
2013
$2.7
$8.4
$21.1
$4.5
$ -
$1.8
$0.3
$1.8
During the current fiscal year, the Company reached an agreement with the minority shareholders of ABV to convert short-term
loans of €1.1 million which were set to expire in May 2013, to long-term loans in the same amount, bearing interest at 5% and
repayable in February 2016. During the second quarter of the current fiscal year, these loans were repaid as part of the acquisition of
the remaining 30% interest of the minority shareholders of ABV (see Highlights section). Over the course of the current fiscal year,
the Company’s Korean special purpose entity converted certain short-term loans totalling KW 1.4 billion into long-term debt with
interest rates ranging from 3.1% to 3.4%. These loans are repayable at maturity in 2015.
18
Management’s discussion and analysis
Other Liabilities
(millions)
Fiscal Year
ended
February 28,
2014
Fiscal Year
ended
February 28,
2013
Three-month
period ended
February 28,
2014
Three-month
period ended
February 28,
2013
Payment of proceeds payable
$2.0
$3.5
$ -
$0.6
In accordance with the provisions of the purchase and sale agreement for ABV, the Company paid $2.0 million to the former
majority shareholders of ABV over the course of the current fiscal year, which represented the final payment of the proceeds
payable at the time of the acquisition.
FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
The Company’s activities expose it to a variety of financial risks: market risk (including currency risk, cash flow interest rate risk
and fair value interest rate risk), credit risk and liquidity risk. The Company’s overall financial risk management program focuses on
mitigating unpredictable financial market risks and their potential adverse effects on the Company’s financial performance.
The Company’s financial risk management is generally carried out by the corporate finance team, based on policies approved by the
Board of Directors. The identification, evaluation and hedging of the financial risks are the responsibility of the corporate finance
team in conjunction with the finance teams of the Company’s subsidiary companies and SPEs. The Company uses derivative
financial instruments to hedge certain risk exposures. Use of derivative financial instruments is subject to a policy which requires
that no derivative transaction be entered into for the purpose of establishing a speculative or leveraged position (the corollary being
that all derivative transactions are to be entered into for risk management purposes only).
Risk overview
The Company’s financial instruments and the nature of risks which they may be subject to are set out in the following table:
Risks
Market
Financial instrument
Currency
Interest rate
Credit
Liquidity
Cash and cash equivalents
Short-term investments
Accounts receivable
Derivative assets
Bank indebtedness
Short-term bank loans
Accounts payable and accrued liabilities
Customer deposits
Dividend payable
Accrual for performance guarantees
Derivative liabilities
Long-term debt
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Market risk
Currency risk
Currency risk on financial instruments is the risk that the fair value of future cash flows of a financial instrument will fluctuate
because of changes in foreign exchange rates. The Company operates internationally and is exposed to foreign exchange risk arising
from various currency exposures. Currency risk arises when future commercial transactions and recognized assets and liabilities are
denominated in a currency other than a company’s functional currency. The Company has operations with different functional
currencies, each of which will be exposed to currency risk based on its specific functional currency.
19
Management’s discussion and analysis
When possible, the Company matches cash receipts in a foreign currency with cash disbursements in that same currency. The
remaining anticipated net exposure to foreign currencies is hedged. To hedge this exposure, the Company uses foreign currency
derivatives, primarily foreign exchange forward contracts. These derivatives are not designated as hedges for accounting purposes.
The amounts outstanding as at February 28, 2014 and 2013 are as follows:
Range of exchange rates
Gain (loss)
(In thousands of U.S. dollars)
Notional amount
(In thousands of indicated currency)
February 28,
2014
February 28,
2013
February 28,
2014
$
February 28,
2013
$
February 28,
2014
February 28,
2013
Foreign exchange forward contracts
1.04-1.12
Sell US$ for CA$ – 0 to 12 months
Sell US$ for € – 0 to 12 months
1.29-1.36
Buy US$ for € – 0 to 12 months
1.34-1.36
Sell US$ for ₤ – 0 to 21 months
1.52
Sell US$ for KW – 0 to 12 months 1,070-1,075
Sell € for US$ – 0 to 12 months
1.31-1.37
-
Buy € for US$ – 0 to 12 months
Buy £ for US$ – 0 to 12 months
1.61-1.68
0.97-1.04
1.28-1.43
1.28-1.41
1.52
-
1.25-1.35
1.26
1.51-1.61
(1,275)
192
(14)
130
94
(133)
-
3
(951) US$43,057
US$8,498
(192)
US$483
1
US$1,315
(6)
US$1,348
-
€9,026
103
-
67
£2,746
(62)
US$43,245
US$8,664
US$33
US$1,485
-
€30,693
€1,420
£889
Foreign exchange forward contracts are contracts whereby the Company has the obligation to sell or buy the currencies at the strike
price. The fair value of the foreign currency instruments is recorded in the consolidated statement of income and reflects the
estimated amounts the Company would have paid or received to settle these contracts as at the financial position date. Gains are
recorded as derivative assets and losses as derivative liabilities on the consolidated statement of financial position.
Cash flow and fair value interest rate risk
The Company’s exposure to interest rate risk is related primarily to its credit facilities, long-term debt and cash and cash equivalents.
Items at variable rates expose the Company to cash flow interest rate risk, and items at fixed rates expose the Company to fair value
interest rate risk. The Company’s long-term debt and credit facilities predominantly bear interest, and its cash and cash equivalents
earn interest at variable rates. An assumed 0.5% change in interest rates would have no significant impact on the Company’s net
income or cash flows.
Credit risk
Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its contractual
obligations. Credit risk arises primarily from the Company’s trade accounts receivable.
The Company’s credit risk related to its trade accounts receivable is concentrated. As at February 28, 2014, two (February 28, 2013
– three) customers accounted for more than 5% each of its trade accounts receivable, of which one customer accounted for 5.4%
(February 28, 2013 – 6.2%), and the Company’s ten largest customers accounted for 36.5% (February 28, 2013 – 43.1%).
In order to mitigate its credit risk, the Company performs a continual evaluation of its customers’ credit and performs specific
evaluation procedures on all its new customers. In performing its evaluation, the Company analyzes the ageing of accounts
receivable, historical payment patterns, customer creditworthiness and current economic trends. A specific credit limit is established
for each customer and reviewed periodically. An allowance for doubtful accounts is recorded when, based on management’s
evaluation, the collection of an account receivable is not reasonably certain.
The Company is also exposed to credit risk relating to derivative financial instruments, cash and cash equivalents and short-term
investments, which it manages by dealing with highly rated financial institutions.
The Company’s primary credit risk is limited to the carrying value of the trade accounts receivable and gains on derivative assets.
20
Management’s discussion and analysis
The table below summarizes the ageing of the trade accounts receivable as at:
(In thousands of U.S. dollars)
Current
Past due 0 to 30 days
Past due 31 to 90 days
Past due more than 90 days
Less: Allowance for doubtful accounts
Trade accounts receivable
Other receivables
Total accounts receivable
The table below summarizes the movement in the allowance for doubtful accounts:
(In thousands of U.S. dollars)
Balance – Beginning of year
Bad debt expenses
Recoveries of trade accounts receivable
Write-off of trade accounts receivable
Foreign exchange
Balance – End of year
February 28,
2014
$
February 28,
2013
$
93,053
13,251
9,375
9,039
124,718
917
123,801
5,177
97,741
10,351
8,702
10,793
127,587
1,525
126,062
8,312
128,978
134,374
February 28,
2014
$
February 28,
2013
$
1,525
767
(1,237)
(168)
30
917
1,144
916
(472)
(50)
(13)
1,525
Liquidity risk – see discussion in liquidity and capital resources section
CONTINGENCIES (in thousands of U.S. dollars, excluding number of cases)
Two of the Company’s U.S. subsidiaries have been named as defendants in a number of pending lawsuits that seek to recover
damages for personal injury allegedly caused by exposure to asbestos-containing products manufactured and sold in the past.
Management believes it has a strong defence related to certain products that may have contained an internal asbestos containing
component. 856 claims were outstanding at the end of the reporting period (February 28, 2013 – 764). These claims were filed in
the states of Arizona, Arkansas, California, Connecticut, Delaware, Florida, Hawaii, Illinois, Louisiana, Maine, Maryland,
Massachusetts, Mississippi, Missouri, New Jersey, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, South Carolina,
Texas, Virginia, Washington and West Virginia. During the current fiscal year, the Company resolved 368 claims (February 28,
2013 – 330) and was the subject of 460 new claims (February 28, 2013 – 423). Because of the many uncertainties inherent in
predicting the outcome of these proceedings, as well as the course of asbestos litigation in the United States, management believes
that it is not possible to make an estimate of the Company’s asbestos liability. Accordingly, no provision has been set up in the
accounts. Settlement costs and legal fees related to these asbestos claims amounted to $1,813 for the quarter (February 28, 2013 -
$3,173) and $5,472 for the year (February 28, 2013 - $8,763).
21
Management’s discussion and analysis
OFF-BALANCE SHEET ARRANGEMENTS
The Company has entered into certain off-balance sheet arrangements. They are fully described in notes 22 and 25 of the
Company’s audited consolidated financial statements. The types of transactions entered into, all of which are in the normal course
of business, are as follows:
Performance bond guarantees related to product warranty and on-time delivery
•
• Letters of credit issued to overseas suppliers
• Operating leases
RELATED PARTY TRANSACTIONS (in thousands of U.S. dollars)
The Company has entered into the following transactions with related parties, which are measured at their exchange value.
a)
PDK Machine Shop Ltd. (“PDK”) is a company owned by certain relatives of the controlling shareholder. PDK is a
supplier of machined material components for use in Velan’s plants.
Purchases of material components
Sales of raw material
Three months ended Twelve months ended
Feb. 28,
Feb. 28,
2013
2014
$1,909
$434
168
32
Feb. 28,
2013
$385
9
Feb. 28,
2014
$1,889
104
The Company entered into an agreement with PDK pursuant to which it has the right to purchase the shares of PDK for a
consideration equal to the book value thereof in the event that they propose to sell their shares to a third party. In the event
that PDK proposes to sell all or substantially all of its assets to a third party, the Company has the right to purchase
inventory at cost and other assets at book value. In the event of a proposed liquidation or sale of sufficient assets such that
PDK cannot fulfill its obligations to the Company under any outstanding purchase orders, the Company also has the right
and the obligation to purchase PDK’s inventory at an amount equal to the cost thereof. The maximum obligation of the
Company pursuant to such put right is $200.
b)
SteamTree Systems, Inc. (“SteamTree”) is a company, which is 50%-owned by a different relative of the controlling
shareholder. SteamTree provides consulting and custom design services related to computer software and software
applications. SteamTree developed and implemented a computerized quotations system presently used by Velan’s
Marketing department.
Software development and consulting services
Three months ended Twelve months ended
Feb. 28,
Feb. 28,
2013
2014
$17
$1
Feb. 28,
2013
$3
Feb. 28,
2014
$4
c)
One of the Company`s subsidiaries and certain of its executives lease, on a weekly basis, a property from Velan Holdings
Co. Ltd., the controlling shareholder. Velan Holdings Co. Ltd. charges weekly rates based on usage.
Three months ended Twelve months ended
Feb. 28,
Feb. 28,
2013
2014
$25
$8
Feb. 28,
2013
$6
Feb. 28,
2014
$25
Rent
22
Management’s discussion and analysis
CONTROLS AND PROCEDURES
Disclosure controls and procedures
Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and
reported to senior management, including the Chief Executive Officer (“CEO”), and the Chief Financial Officer (“CFO”), in a
timely manner so that appropriate decisions can be made regarding public disclosure.
The CEO and the CFO of the Company have evaluated, or caused the evaluation of, under their direct supervision, the effectiveness
of the Company’s disclosure controls and procedures (as defined in National Instrument 52-109 – Certification of Disclosure in
Issuer’s Annual and Interim Filings) as at February 28, 2014 and have concluded that such disclosure controls and procedures were
designed and operating effectively.
Internal control over financial reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with IFRS.
Management has evaluated the design and effectiveness of its internal controls and procedures over financial reporting (as defined in
National Instrument 52-109 – Certification of Disclosure in Issuer’s Annual and Interim Filings). The evaluation was based on the
“Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). This evaluation was performed by the CEO and the CFO of the Company with the assistance of other Company
Management and staff to the extent deemed necessary. Based on this evaluation, the CEO and the CFO concluded that the internal
controls and procedures over financial reporting were appropriately designed and operating effectively as at February 28, 2014.
In spite of its evaluation, Management does recognize that any controls and procedures no matter how well designed and operated,
can only provide reasonable assurance and not absolute assurance of achieving the desired control objectives. In the unforeseen
event that lapses in the disclosure of internal controls and procedures occur and/or mistakes happen of a material nature, the
Company intends to take the steps necessary to minimize the consequences thereof.
Changes in internal control over financial reporting
The Company did not make any material changes to the design of internal control over financial reporting during the year and three-
month period ended February 28, 2014 that have materially affected, or are reasonably likely to have materially affected, the
Company’s internal control over financial reporting.
CRITICAL ACCOUNTING ESTIMATES & JUDGEMENTS
The Company’s financial statements are prepared in accordance with IFRS as issued by the IASB. The Company’s significant
accounting policies as described in note 2 of the Company’s audited consolidated financial statements are essential to understanding
the Company’s financial positions, results of operations and cash flows. Certain of these accounting policies require critical
accounting estimates that involve complex and subjective judgments and the use of assumptions, some of which may be for matters
that are inherently uncertain and susceptible to change. The assumptions and estimates used are based on parameters which are
derived from the knowledge at the time of preparing the financial statements and believed to be reasonable under the circumstances.
In particular, the circumstances prevailing at this time and assumptions as to the expected future development of the global and
industry-specific environment were used to estimate the Company’s future business performance. Where these conditions develop
differently than assumed and beyond the control of the Company, the actual results may differ from those anticipated (see Forward-
looking information section above). These estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to
accounting estimates are recognized in the period in which the estimate is changed. There were no significant changes made to
critical accounting estimates during the past two financial years.
The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year are addressed below:
Accounts receivable
The Company must report its accounts receivable at their net realizable value. This involves management judgment and requires the
Company to perform continuous evaluations of their collectability and to record an allowance for doubtful accounts when required.
In performing its evaluation, the Company analyzes the ageing of accounts receivable, concentration of receivables by customer,
customer creditworthiness and current economic trends. Any change in the assumptions used could impact the carrying value of the
23
Management’s discussion and analysis
accounts receivable on the consolidated statement of financial position with a corresponding impact made to administration costs on
the consolidated statement of income.
Inventory
Inventories must be valued at the lower of cost and net realizable value. A writedown of inventory will occur when its estimated
market value less applicable variable selling expenses is below its carrying amount. This involves significant management judgment
and is based on the Company’s assessment of market conditions for its products determined by historical usage, estimated future
demand and, in some cases, the specific risk of loss on specifically identified inventory. Any change in the assumptions used in
assessing this valuation or selling costs could impact the carrying amount of the inventory on the consolidated statement of financial
position with a corresponding impact made to cost of sales on the consolidated statement of income.
Provisions
Provisions must be established for possible product warranty expenses. The Company estimates its warranty exposure by taking into
account past experience as well as any known technical problems and estimates of costs to resolve these issues. The Company
estimates its exposure under these obligations based on an analysis of all identified or expected claims. Any change in the
assumptions used could impact the value of the provision on the consolidated statement of financial position with a corresponding
impact made to cost of sales on the consolidated statement of income.
Accrual for performance guarantees
Accruals for performance guarantees must be established for possible late delivery and other contractual non-compliance penalties
or liquidated damages. The Company estimates its exposure by taking into account past experience, as well as any known non-
compliance with its contractual obligations, and estimates of costs to resolve these issues. The Company estimates its exposure
under these obligations based on an analysis of all identified or expected claims. Any change in the assumptions used could impact
the value of the accrual on the consolidated statement of financial position with a corresponding impact made to cost of sales on the
consolidated statement of income.
Asset impairment test
Assets that have an indefinite life, such as goodwill, are tested annually by the Company for impairment, or more frequently if
events or circumstances indicate there may be impairment. All other assets must be reviewed by the Company at the end of each
reporting period in order to determine whether there is an indication of possible impairment. For the purposes of impairment testing,
assets are grouped at the lowest levels for which there are separately identifiable cash flows. A cash-generating unit (“CGU”) is the
smallest group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of
assets. If an indication of impairment exists, the Company estimates the recoverable amount of the CGU in order to determine the
extent of the impairment loss, if any. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds
its recoverable amount. The recoverable amount is the greater of an asset’s fair value less costs to sell and its value in use. In
assessing value in use, the Company estimates future cash flows which are discounted to their present value using a pre-tax discount
rate that reflects current market assessments of the time value of money and the risks specific to the asset. Any change in the
assumptions used could impact the carrying amount first of any goodwill allocated to the CGU and then to the other assets of the
CGU on a pro rata basis of the carrying amount of each asset in the CGU on the consolidated statement of financial position with a
corresponding impact made to the consolidated statement of income.
Income taxes
The Company must estimate its income taxes in each jurisdiction in which it operates. This involves assessing the probability of
using net operating losses against future taxable income as well as evaluating positions taken in tax returns with respect to situations
in which applicable tax regulation is subject to interpretation. In the event these assessments are changed, there would be an
adjustment to income tax expense with a corresponding adjustment to income tax balances on the consolidated statement of financial
position.
24
Management’s discussion and analysis
ACCOUNTING STANDARDS AND AMENDMENTS ADOPTED IN THE YEAR
The following standards and amendments to existing standards were adopted by the Company on March 1, 2013. The adoption of
these standards and amendments did not have a significant impact on the Company’s financial statements.
(i)
(ii)
(iii)
(iv)
IFRS 10, Consolidated Financial Statements, requires an entity to consolidate an investee when it has power over the
investee, is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect
those returns through its power over the investee. Under previous IFRS, consolidation was required when an entity had
the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. IFRS 10
replaced SIC-12, Consolidation -Special Purpose Entities and parts of IAS 27, Consolidated and Separate Financial
Statements.
IFRS 11, Joint Arrangements, requires a venturer to classify its interest in a joint arrangement as a joint venture or joint
operation. Joint ventures are accounted for using the equity method of accounting whereas for a joint operation the
venturer recognizes its share of the assets, liabilities, revenue and expenses of the joint operation. Under previous IFRS,
entities had the choice to proportionately consolidate or equity account for interests in joint ventures. IFRS 11 superseded
IAS 31, Interests in Joint Ventures, and SIC-13, Jointly Controlled Entities—Non-monetary Contributions by Venturers.
IFRS 12, Disclosure of Interests in Other Entities, establishes disclosure requirements for interests in other entities, such
as subsidiaries, joint arrangements, associates, and unconsolidated structured entities. The standard carried forward
existing disclosures and also introduced significant additional disclosure that addressed the nature of, and risks associated
with, an entity’s interests in other entities. See note 6 for additional disclosures presented.
IFRS 13, Fair Value Measurement, is a comprehensive standard for fair value measurement and disclosure for use across
all IFRS standards. The standard clarifies that fair value is the price that would be received to sell an asset, or paid to
transfer a liability in an orderly transaction between market participants, at the measurement date. Under previous IFRS,
guidance on measuring and disclosing fair value was dispersed among the specific standards requiring fair value
measurements and did not always reflect a clear measurement basis or consistent disclosures.
(v) There have been amendments to existing standards, including IAS 27, Separate Financial Statements (“IAS 27”), and
IAS 28, Investments in Associates and Joint Ventures (“IAS 28”). IAS 27 addressed accounting for subsidiaries, jointly
controlled entities and associates in non-consolidated financial statements. IAS 28 had been amended to include joint
ventures in its scope and to address the changes in IFRS 10 – 13.
(vi)
IAS 1, Presentation of Financial Statements, has been amended to require entities to separate items presented in other
comprehensive income into two groups, based on whether or not items may be recycled in the future. Entities that choose
to present other comprehensive income items before tax are required to show the amount of tax related to the two groups
separately.
ACCOUNTING STANDARDS AND AMENDMENTS ISSUED BUT NOT YET ADOPTED
The following revised standard is effective for annual periods beginning on or after January 1, 2015 with earlier application
permitted. The Company has not yet assessed the impact of the standard or determined whether it will early adopt it.
(i)
IFRS 9, Financial Instruments, was issued in November 2009 and addresses classification and measurement of financial
assets. It replaces the multiple category and measurement models in IAS 39, Financial Instruments: Recognition and
Measurement, for debt instruments with a new mixed measurement model having only two categories: amortized cost and
fair value through profit or loss. IFRS 9 also replaces the models for measuring equity instruments. Such instruments are
either recognized at fair value through profit or loss or at fair value through other comprehensive income. Where equity
instruments are measured at fair value through other comprehensive income, dividends are recognized in profit or loss to
the extent that they do not clearly represent a return of investment; however, other gains and losses (including
impairments) associated with such instruments remain in accumulated comprehensive income indefinitely.
Requirements for financial liabilities were added to IFRS 9 in October 2010 and they largely carried forward existing
requirements in IAS 39, except that fair value changes due to credit risk for liabilities designated at fair value through
profit or loss are generally recorded in other comprehensive income.
25
Management’s discussion and analysis
CERTAIN RISKS THAT COULD AFFECT OUR BUSINESS
Cyclical nature of end user markets
The demand for the Company’s products in any particular industry or market can vary significantly according to the level of
economic activity in that industry or market. These potential variations may be mitigated by the fact that the Company’s sales are
diversified geographically as well as by end user market. There can be no assurance that an economic recession or downturns in
certain industries or geographic locations will not have a significant adverse effect on the Company’s sales.
Competition
Competitive pressures in the Company’s markets could lead to a loss of market share, which could negatively impact revenues,
margins and net income. The Company also competes with manufacturers based in low wage countries that offer valves at
substantially lower prices. There can be no assurance that the Company will be able to compete successfully against its current or
future competitors or that competition will not have a material adverse effect on the Company's results of operations and financial
condition.
Backlog
The Company’s order backlog consists of sales orders that are considered firm. It is also an indication of future sales revenues.
However, there can be no assurance that subsequent cancellations or scope adjustments will not occur, that the order backlog will
ultimately result in earnings, or when the related revenues and earnings from such order backlog will be recognized.
Dependence upon key personnel
The Company is dependent upon the abilities and experience of its executive officers and other key employees. There can be no
assurance that the Company can retain the services of such executive officers and key employees. If several executive officers or
other key employees were to leave the employ of the Company, its operations could be adversely affected.
Foreign currency exchange risks
Due to the geographic mix of the Company’s customers and its operations, the Company is exposed to foreign currency exchange
risk. The Company enters into simple foreign currency forward contracts in order to manage a portion of its net exposure to foreign
currencies. Such forward contracts contain an inherent credit risk related to default on obligations by the counterparty, which the
company mitigates by entering into contracts with sound financial institutions that it anticipates will satisfy their obligations. Risk
related to currency fluctuations could have a material adverse effect on the Company's results of operations and its financial position.
Interest rate risk
A portion of the Company’s liabilities consist of debt instruments that bear interest at variable rates. As such, the Company is
exposed to the risk of interest rate fluctuations. This risk could have an adverse effect on the Company’s results of operations.
Availability and prices of raw materials
The price of raw materials, principally steel, represents a substantial portion of the cost of manufacturing the Company’s products.
Historically, there have been fluctuations in these raw material prices and, in some instances, price movements have been volatile.
There can be no certainty that the Company will be able to pass on increases resulting from higher costs of raw materials to its
customers through increases in selling prices, or otherwise absorb such cost increases without significantly affecting its margins.
In addition, certain raw materials are in short supply for a period of time. Typically, these shortages do not last long and the
Company is usually able to ensure that its needs are met. However, there can be no assurances that its sources of supply will be
adequate to supply all of its needs on a timely basis.
Labour relations
A substantial portion of the Company’s workforce is covered by union agreements. Although the Company has been successful in
the past in negotiating renewals, there can be no assurance that this will continue. Failure to renegotiate these agreements could lead
to work disruptions or higher labour costs, which could negatively impact results.
Reliance on key suppliers
The Company has several key suppliers with whom it has invested in forging dies and casting patterns. While the Company has
alternate sources for most material purchases, the loss of a key supplier could impact negatively on the Company.
Reliance on distributors and sales agents
The Company is directly affected by the ability of independent third party distributors and sales agents retained by the Company to
sell its products in their respective markets. The Company’s continued success is thus dependent on its ability to attract and retain
the distributors and sales agents it requires to support its existing business and to continue to grow.
26
Management’s discussion and analysis
Project undertakings
In competing for the sales of valves, the Company may enter into contracts that provide for the production of valves at specified
prices and in accordance with time schedules. These contracts may involve greater risks as a result of unforeseen increases in the
prices of raw materials and other costs due to more stringent terms and conditions. Although contract terms may vary from customer
to customer, production delays and other performance issues may call for liquidated damages or other penalties in case of non-
performance or warranty issues due to the more stringent terms and conditions of such contracts.
Political and economic risks associated with international sales and operations
Since the Company sells and manufactures its products worldwide, the business is subject to risks associated with doing business
internationally. The Company’s business and operating results could be impacted by trade protection measures, changes in tax laws,
possibility of expropriation and embargo, foreign exchange restrictions and political, military and/or terrorist disruptions or changes
in regulatory environments.
Force majeure events
Force majeure events are unforeseeable events or circumstances that occur beyond the control of the Company. Such events include
but are not limited to political unrest, war, terrorism, strikes, riots, and crime, as well as seismic or severe weather related events
such as earthquakes, hurricanes, tsunamis, tornadoes, ice storms, flooding and volcanic eruptions. The risk of occurrence of a force
majeure event is unpredictable and may result in delays or cancellations of orders and deliveries to customers, delays in the receipt
of materials from suppliers, damage to facilities or equipment, personal injury or fatality, and possible legal liability.
Asbestos litigation
Two of the Company’s U.S. subsidiaries have been named as defendants in a number of pending lawsuits that seek to recover
damages for personal injury allegedly caused by exposure to asbestos-containing products manufactured and sold in the past.
Management believes it has a strong defense related to certain products that may have contained an internal component containing
asbestos. Although it is defending these allegations vigorously, there can be no assurance that the Company will prevail.
Unfavorable rulings, judgments or settlement terms could have a material adverse impact on the Company’s business, financial
condition, results of operations and cash flows.
Product liability and other lawsuits
The Company, like other worldwide manufacturing companies, has been, and will continue to be, subject to a variety of potential
liability claims or other lawsuits connected with its business operations, including potential liabilities and expenses associated with
possible product defects or failures. While the Company maintains comprehensive general liability insurance coverage which it
considers to generally be in accordance with industry practice, such insurance does not cover certain categories of claims (such as
ongoing asbestos claims) to which the Company is subject. Comprehensive general liability premiums have also increased
significantly during the last several years. Accordingly, the Company cannot be certain that comprehensive general liability
insurance coverage will continue to be available to it at a reasonable cost, or, if available, would be adequate to cover its liabilities.
Health and safety risk
The Company is committed to providing all employees, contractors, and visitors to its premises with a healthy and safe work
environment. The Company has implemented a program throughout its operations with policies and procedures that must be
followed to ensure that it meets all applicable health and safety laws, regulations, and standards. The Company recognizes that a
lack of a strong health and safety program may expose it to lost production time, penalties and lawsuits, and may impact future
orders as customers may take into account the Company’s health and safety record when awarding sales contracts.
Environmental compliance matters
The Company’s operations and properties are subject to increasingly stringent laws and regulations relating to environmental
protection, including air and water discharges, waste management and disposal and employee safety. Such laws and regulations both
impose substantial fines for violations and mandate cessation of operations in certain circumstances, the installation of costly
pollution control equipment, or the undertaking of costly site remediation activities. Furthermore, new laws and regulations, or
stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new
clean up requirements could require the Company to incur additional costs which could be significant.
Controls over disclosures and financial reporting
In accordance with National Instrument 52-109, the CEO and the CFO of the Company are responsible for designing, maintaining,
and evaluating the effectiveness of disclosure controls and procedures. The CEO and the CFO are also responsible for the effective
design of internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements in accordance with IFRS. A system of controls is subject to certain inherent limitations
and is partially based on the possibility or probability of future events. Accordingly, a system of internal controls can provide only
reasonable, and not absolute, assurance of reaching the desired objectives.
27
Management’s discussion and analysis
Control of the company
Velan Holding Co. Ltd. (the “Controlling Shareholder”) owns 15,566,567 Multiple Voting Shares representing, in the aggregate,
approximately 92.4% of the voting interests in the Company. Voting control enables the Controlling Shareholder to determine all
matters requiring shareholder approval. The Controlling Shareholder has advised the Company that the disposition of the shares
requires the consent of certain Velan family members and controlled entities.
The Controlling Shareholder effectively has sufficient voting power to prevent a change in control of the Company. The sale of a
significant number of Subordinate Voting Shares by the Controlling Shareholder pursuant to the exercise of the conversion right
attached to the Multiple Voting Shares may impact upon the market price and liquidity thereof.
Income and other tax risks
The Company operates in a number of different tax jurisdictions and has a significant amount of cross-border purchase and sale
transactions. The tax rules and regulations in various countries are becoming more complex. There is a risk that one or more tax
authorities could disagree with the tax treatment adopted by the Company, resulting in defense costs and possible tax assessments.
Compliance with international laws
Due to the international nature of its operations, the Company is subject to differing systems of laws and regulations which are often
complex and differ from one country to the next. Such laws and regulations include but are not limited to anti-bribery legislation,
export and customs controls, foreign currency exchange controls, transfer pricing regulations and economic sanctions imposed by
governmental authorities. Failure to comply with such laws could negatively impact earnings and may result in criminal, civil and
administrative legal sanctions. The Company has implemented policies and procedures to effect compliance with these laws by its
employees and representatives.
Special purpose entities and non-controlling interest
The Company’s operations in China and Taiwan, and certain of its operations in France and Korea are undertaken with partners that
are classified as special purpose entities or non-controlling interest. The success of these operations depends on the satisfactory
performance of such partners in their obligations. The failure of such partners to perform their obligations could impose additional
financial and performance obligations on the Company that could negatively impact its earnings and financial condition.
Business acquisitions
The success of a business acquisition depends in part upon the integration of the acquired business through such tasks as the
realization of synergies, elimination of cost duplication, information systems integration, and establishment of controls and
procedures. The inability to adequately integrate an acquired business in a timely manner might result in lost business opportunities,
higher than expected integration costs and departures of key personnel, all of which could have a negative impact on earnings.
28
Management’s discussion and analysis
RECONCILIATIONS AND NON-IFRS MEASURES
In this MD&A, the Company presented measures of performance or financial condition which are not defined under IFRS (“non-
IFRS measures”) and are therefore unlikely to be comparable to similar measures presented by other companies. These measures are
used by management in assessing the operating results and financial condition of the Company and are reconciled with the
performance measures defined under IFRS. Reconciliations of these amounts can be found below.
Net cash
(millions)
Cash and cash equivalents
Short-term investments
Bank indebtedness
Short-term bank loans
Current portion of long-term bank borrowings
Fiscal year
ended
Fiscal year
ended
Feb. 28,
2014
Feb. 28,
2013
106.7
0.2
(31.9)
(0.9)
(6.4)
77.2
0.4
(48.6)
(2.3)
(6.9)
67.7
19.8
Adjusted net operating results
(millions)
Fiscal year
ended
Fiscal year
ended
Three-month
period ended
Three-month
period ended
Feb. 28,
2014
Feb. 28,
2013
Feb. 28,
2014
Feb. 28,
2013
Net income (loss) attributable to Subordinate Voting Shares and
Multiple Voting Shares
29.4
6.2
10.4
(3.6)
Adjustments for:
Goodwill impairment loss
Interest accretion on ABV proceeds payable
Fair value adjustment for ABV proceeds payable
Unrealized foreign exchange gain on ABV proceeds payable
-
-
-
-
11.7
0.7
(2.4)
(0.4)
-
-
-
-
11.7
0.2
(2.2)
-
Adjusted net operating results
29.4
15.8
10.4
6.1
29
Velan Inc.
Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
30
May 20, 2014
Independent Auditor’s Report
To the Shareholders of
Velan Inc.
We have audited the accompanying consolidated financial statements of Velan Inc. and its subsidiaries,
which comprise the consolidated statements of financial position as of February 28, 2014 and February
28, 2013 and the consolidated statements of income, of comprehensive income, of changes in equity and of
cash flows for the years then ended, and the related notes, which comprise a summary of significant
accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards, and for such internal control
as management determines is necessary to enable the preparation of consolidated financial statements
that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those
standards require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the consolidated financial statements. The procedures selected depend on the auditor’s judgment,
including the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order
to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a
basis for our audit opinion.
PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l.
1250 René-Lévesque Boulevard West, Suite 2800, Montréal, Quebec, Canada H3B 2G4
T: +1 514 205 5000, F: +1 514 876 1502, www.pwc.com/ca
“PwC” refers to PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l., an Ontario limited liability partnership.
31
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of Velan Inc. and its subsidiaries as at February 28, 2014 and February 28, 2013 and their
financial performance and their cash flows for the years then ended in accordance with International
Financial Reporting Standards.
1
1 CPA auditor, CA, public accountancy permit No. A123642
32
Velan Inc.
Consolidated Statements of Financial Position
Velan Inc.
Consolidated Statements of Financial Position
(in thousands of U.S. dollars)
(in thousands of U.S. dollars)
Assets
Current assets
Assets
Cash and cash equivalents
Short-term investments
Current assets
Accounts receivable
Cash and cash equivalents
Income taxes recoverable
Short-term investments
Inventories (note 5)
Accounts receivable
Deposits and prepaid expenses
Income taxes recoverable
Derivative assets
Inventories (note 5)
Deposits and prepaid expenses
Derivative assets
Non-current assets
Property, plant and equipment (notes 7 and 12)
Intangible assets and goodwill (note 8)
Non-current assets
Deferred income taxes (note 20)
Property, plant and equipment (notes 7 and 12)
Other assets
Intangible assets and goodwill (note 8)
Deferred income taxes (note 20)
Other assets
Total assets
Total assets
Liabilities
Current liabilities
Liabilities
Bank indebtedness (note 10)
Short-term bank loans
Current liabilities
Accounts payable and accrued liabilities (note 9)
Bank indebtedness (note 10)
Income tax payable
Short-term bank loans
Dividend payable
Accounts payable and accrued liabilities (note 9)
Customer deposits
Income tax payable
Provisions (note 11)
Dividend payable
Accrual for performance guarantees
Customer deposits
Derivative liabilities
Provisions (note 11)
Current portion of long-term debt (note 12)
Accrual for performance guarantees
Current portion of other liabilities (note 3)
Derivative liabilities
Current portion of long-term debt (note 12)
Current portion of other liabilities (note 3)
Non-current liabilities
Long-term debt (note 12)
Deferred income taxes (note 20)
Non-current liabilities
Other liabilities
Long-term debt (note 12)
Deferred income taxes (note 20)
Other liabilities
Total liabilities
Equity
Total liabilities
Equity attributable to Subordinate and Multiple Voting shareholders
Equity
Share capital (note 13)
Contributed surplus
Equity attributable to Subordinate and Multiple Voting shareholders
Retained earnings
Share capital (note 13)
Accumulated other comprehensive loss
Contributed surplus
Retained earnings
Accumulated other comprehensive loss
Non-controlling interest (note 6)
Total equity
Non-controlling interest (note 6)
Total liabilities and equity
Total equity
Commitments and contingencies (note 22)
Total liabilities and equity
As at
February 28,
2014
As at
$
February 28,
2014
$
As at
February 28,
2013
As at
$
February 28,
2013
$
106,716
239
128,978
106,716
5,465
239
224,149
128,978
5,046
5,465
498
224,149
471,091
5,046
498
471,091
96,605
43,359
11,406
96,605
1,693
43,359
11,406
153,063
1,693
624,154
153,063
77,172
398
134,374
77,172
7,672
398
246,983
134,374
6,048
7,672
340
246,983
472,987
6,048
340
472,987
90,630
43,194
11,226
90,630
1,737
43,194
11,226
146,787
1,737
619,774
146,787
624,154
619,774
31,876
916
76,590
31,876
4,158
916
1,586
76,590
66,842
4,158
8,060
1,586
33,842
66,842
1,501
8,060
10,402
33,842
-
1,501
235,773
10,402
-
235,773
11,685
9,270
8,307
11,685
9,270
29,262
8,307
265,035
29,262
48,580
2,284
78,431
48,580
2,831
2,284
1,701
78,431
76,682
2,831
6,345
1,701
28,525
76,682
1,380
6,345
10,463
28,525
1,951
1,380
259,173
10,463
1,951
259,173
16,387
8,035
8,006
16,387
8,035
32,428
8,006
291,601
32,428
265,035
291,601
76,688
6,099
272,867
76,688
(3,589)
6,099
352,065
272,867
(3,589)
7,054
352,065
359,119
7,054
624,154
359,119
76,314
1,746
250,129
76,314
(8,676)
1,746
319,513
250,129
(8,676)
8,660
319,513
328,173
8,660
619,774
328,173
624,154
619,774
Commitments and contingencies (note 22)
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Approved by the Board of Directors
Approved by the Board of Directors
_________________________
_______ A. K. Velan, Director
________________________________ T.C. Velan, Director
_________________________
_______ A. K. Velan, Director
33
________________________________ T.C. Velan, Director
Velan Inc.
Consolidated Statements of Income
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding per share amounts)
Sales (notes 14 and 24)
Cost of sales (notes 5, 14, 15 and 19)
Gross profit
Administration costs (notes 16 and 19)
Goodwill impairment loss (notes 4 and 8)
Other income (note 3)
Operating profit
Finance income
Finance costs
Finance costs – net
Income before income taxes
Income taxes (note 20)
Net income for the year
Net income attributable to:
Subordinate Voting Shares and Multiple Voting Shares
Non-controlling interest
Earnings per share (note 21)
Basic
Diluted
2014
$
2013
$
489,257
500,574
358,111
386,675
131,146
113,899
87,143
-
(269)
44,272
859
2,369
90,985
11,700
(3,364)
14,578
631
3,191
(1,510)
(2,560)
42,762
11,759
31,003
29,400
1,603
31,003
1.34
1.34
12,018
5,284
6,734
6,169
565
6,734
0.28
0.28
Dividends declared per Subordinate and Multiple Voting Share
0.31 (CA$0.32)
0.32 (CA$0.32)
The accompanying notes are an integral part of these consolidated financial statements.
34
Velan Inc.
Consolidated Statements of Comprehensive Income (Loss)
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars)
Comprehensive income
Net income for the year
Other comprehensive income (loss)
Foreign currency translation adjustment on foreign operations whose functional currency is other
than the reporting currency (U.S. dollar)
Comprehensive income
Comprehensive income attributable to:
Subordinate Voting Shares and Multiple Voting Shares
Non-controlling interest
The accompanying notes are an integral part of these consolidated financial statements.
2014
$
2013
$
31,003
6,734
6,311
37,314
35,624
1,690
37,314
(4,531)
2,203
1,710
493
2,203
35
Velan Inc.
Consolidated Statements of Changes in Equity
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars)
Equity attributable to Subordinate and Multiple Voting shareholders
Accumulated
other
comprehensive
income (loss)
Contributed
surplus
Retained
earnings
Total
Share capital
Non-controlling
interest
Total equity
Balance - February 29, 2012
78,764
1,871
(4,217)
250,951
327,369
8,208
335,577
Net income for the year
Other comprehensive loss
-
-
-
-
-
(4,459)
6,169
-
6,169
(4,459)
565
(72)
6,734
(4,531)
78,764
1,871
(8,676)
257,120
329,079
8,701
337,780
Effect of share-based compensation (note 13(d))
Dividends
Multiple Voting Shares
Subordinate Voting Shares
Non-controlling interest
Share repurchase (note 13(c))
-
-
-
-
(2,450)
58
-
-
-
(183)
-
-
-
-
-
-
(4,988)
(2,003)
-
-
58
(4,988)
(2,003)
-
(2,633)
-
-
-
(41)
-
58
(4,988)
(2,003)
(41)
(2,633)
Balance - February 28, 2013
76,314
1,746
(8,676)
250,129
319,513
8,660
328,173
Net income for the year
Other comprehensive income
-
-
-
-
-
6,224
29,400
-
29,400
6,224
1,603
87
31,003
6,311
76,314
1,746
(2,452)
279,529
355,137
10,350
365,487
Effect of share-based compensation (note 13(d))
Shares issued under Share Option Plan (note 13(d))
Dividends
Multiple Voting Shares
Subordinate Voting Shares
Non-controlling interest
Acquisition of non-controlling interest (note 6(d))
-
374
-
-
-
-
Balance - February 28, 2014
76,688
23
-
-
-
-
4,330
6,099
-
-
-
-
-
(1,137)
-
-
(4,760)
(1,902)
-
-
23
374
(4,760)
(1,902)
-
3,193
-
-
-
-
(103)
(3,193)
23
374
(4,760)
(1,902)
(103)
-
(3,589)
272,867
352,065
7,054
359,119
The accompanying notes are an integral part of these consolidated financial statements.
36
Velan Inc.
Consolidated Statements of Cash Flow
For the years ended February 28, 2014 and 2013
(in thousands of dollars)
Cash flows from
Operating activities
Net income for the year
Adjustments to reconcile net income to cash provided by operating activities (note 27)
Changes in non-cash working capital items (note 28)
Cash provide d by ope rating activitie s
Investing activities
Short-term investments
Additions to property, plant and equipment
Additions to intangible assets
Proceeds on disposal of property, plant and equipment, and intangible assets
Net change in other assets
Cash use d by inve sting activitie s
Financing activities
Dividends paid to Subordinate and Multiple Voting shareholders
Dividends paid to non-controlling interest
Shares issued under Share Option Plan (note 13(d))
Repurchase of shares (note 13(c))
Payment of proceeds payable (note 3)
Short-term bank loans
Increase in long-term debt
Repayment of long-term debt
Cash provide d (use d) by financing activitie s
Effect of exchange rate differences on cash
Net change in cash during the year
Net cash – Beginning of the year
Net cash – End of the year
Net cash is composed of:
Cash and cash equivalents
Bank indebtedness
S upplementary information
Interest paid
Income taxes paid
The accompanying notes are an integral part of these consolidated financial statements.
37
2014
$
2013
$
31,003
15,890
28,566
75,459
159
(17,953)
(397)
396
44
(17,751)
(6,777)
(103)
374
-
(1,960)
(1,368)
2,654
(8,430)
(15,610)
6,734
23,389
(15,711)
14,412
4,556
(28,452)
(684)
905
(270)
(23,945)
(7,081)
(41)
-
(2,633)
(3,465)
1,426
21,057
(4,478)
4,785
4,150
364
46,248
28,592
(4,384)
32,976
74,840
28,592
106,716
(31,876)
74,840
77,172
(48,580)
28,592
(1,062)
(1,697)
(1,895)
(2,042)
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
1 General information and basis of preparation
These consolidated financial statements represent the consolidation of the accounts of Velan Inc. (the
“Company”) and the entities over which it has control, its subsidiary companies and special-purpose entities
(“SPEs”). The Company is an international manufacturer of industrial valves.
The Company is a public company listed on the Toronto Stock Exchange under the symbol “VLN”. It was
incorporated under the name Velan Engineering Ltd. on December 12, 1952 and continued under the Canada
Business Corporations Act on February 11, 1977. It changed its name to Velan Inc. on February 20, 1981.
Velan Inc. maintains its registered head office at 7007 Côte de Liesse, Montréal, Quebec, Canada, H4T 1G2.
The Company’s ultimate parent company is Velan Holdings Co. Ltd.
The Company’s consolidated financial statements have been prepared in accordance with International
Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
These consolidated financial statements were approved by the Company’s Board of Directors on May 20, 2014.
2 Summary of significant accounting policies
Functional and presentation currency
Functional currency is defined as the currency of the primary economic environment in which an entity
operates. Indicators for determining an entity’s functional currency are broken down into primary and secondary
indicators.
Primary indicators include:
•
•
•
the currency of sales and cash inflows;
the currency of the country having primary influence over sales prices; and
the currency of expenses and cash outflows.
Primary indicators receive more weight than secondary indicators. If a functional currency can be determined
based on the primary indicators, the secondary indicators are not considered.
The functional and presentation currency of the Company is the U.S. dollar.
Consolidation
These financial statements represent the consolidation of the accounts of the Company and the entities over
which it has control, its subsidiary companies and SPEs. Control exists when the Company is exposed to, or has
rights to, variable returns from its involvement with an entity and has the ability to affect those returns through
its power to direct the activities of an entity. Subsidiary companies and SPEs are fully consolidated from the
date control has been transferred to the Company and deconsolidated from the date control ceases.
All subsidiary companies and SPEs prepare their financial statements at the same reporting date as the Company
except for Velan Valvac Manufacturing Co. Ltd., which has a December 31 fiscal year-end. Consolidated
earnings include the Company’s share of the results of its operations to that date. Intercompany transactions,
balances and unrealized gains or losses on transactions between companies are eliminated.
38
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Foreign currency transactions and balances
The Company and its subsidiary companies and SPEs translate foreign currency transactions and balances into
their functional currency. Foreign currency is defined as any currency that is different from an individual
entity’s functional currency.
Monetary assets and liabilities in foreign currencies are translated at year-end exchange rates. Non-monetary
assets are translated at rates prevailing at the transaction dates. Revenue and expenses in foreign currencies are
translated at weekly average rates throughout the year. Gains and losses arising on translation are included in the
consolidated statement of income for the year.
Translation of accounts of foreign subsidiary companies and SPEs
The financial statements of the Company’s foreign subsidiary companies and SPEs whose functional currency is
not the U.S. dollar are translated into U.S. dollars for reporting purposes. All assets and liabilities are translated
at year-end rates, and revenue and expenses at the average rate for the period. Resulting gains and losses are
included in other comprehensive income (loss) for the period.
Financial instruments
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or
equity instrument of another entity. The Company’s financial assets comprise mainly cash and cash equivalents,
short-term investments, accounts receivable and derivative assets. The Company’s financial liabilities comprise
mainly bank indebtedness, short-term bank loans, accounts payable and accrued liabilities, customer deposits,
dividend payable, accrual for performance guarantees, long-term debt and derivative liabilities.
The Company recognizes a financial instrument on its consolidated statement of financial position when the
Company becomes party to the contractual provisions of the financial instrument or non-financial derivative
contract (see Embedded derivatives). Financial assets are derecognized when the rights to receive cash flows
from the assets have expired or been transferred and the Company has transferred substantially all risks and
rewards of ownership. All financial instruments are initially recognized at fair value and are classified into one
of these five categories: held for trading, available-for-sale assets, held-to-maturity investments, loans and
receivables and other financial liabilities. The classification depends on the purpose for which the financial
instruments were acquired and their characteristics. Except in very limited circumstances, the classification is
not changed subsequent to initial recognition.
Held for trading
Financial instruments classified as held for trading are carried at fair value at each statement of financial
position date with the changes in fair value recorded in the consolidated statement of income in the period in
which these changes arise. The Company has classified its derivative financial instruments as held for trading.
Loans and receivables, held-to-maturity investments and other financial liabilities
Financial instruments classified as loans and receivables, held-to-maturity investments and other financial
liabilities are carried at amortized cost using the effective interest rate method. The interest income or expense is
included in the consolidated statement of income over the expected life of the instrument. Cash and cash
39
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
equivalents, short-term investments and accounts receivable are classified as loans and receivables. Bank
indebtedness, short-term bank loans, accounts payable and accrued liabilities, customer deposits, dividend
payable, accrual for performance guarantees and long-term debt, including interest payable, are classified as
other financial liabilities, all of which are measured at amortized cost.
Embedded derivatives
Derivatives may be embedded in other financial instruments (the “host instrument”). Embedded derivatives are
treated as separate derivatives if their economic characteristics and risks are not closely related to those of the
host instrument, the terms of the embedded derivative are the same as those of a stand-alone derivative, and the
combined contract is not held for trading or designated at fair value through profit or loss. These embedded
derivatives are classified as held for trading.
The Company and its subsidiary companies and SPEs enter into certain contracts for the purchase and sale of
non-financial items that are denominated in currencies other than their respective functional currencies. In cases
where the foreign exchange component is not leveraged and does not contain an option feature, the contract is
denominated in the functional currency of the counterparty or the non-financial item is routinely denominated in
the currency of the contract or the currency of the contract is commonly used in the economic environment in
which the transaction takes place, the embedded derivative is considered to be closely related and is not
accounted for separately.
The fair value of the embedded derivatives related to sales contracts is recorded in sales; purchase contracts are
recorded in cost of sales. On the consolidated statement of financial position, gains are recorded as derivative
assets and losses are recorded as derivative liabilities.
Transaction costs are expensed when incurred.
Fair value
Estimated fair values for financial instruments are designed to approximate amounts at which the instruments
could be exchanged in a current arm’s-length transaction between knowledgeable willing parties. The fair value
of derivative instruments is determined using valuation techniques.
The Company has evaluated the fair values of its financial instruments based on the current interest rate
environment, related market values and current pricing of financial instruments with comparable terms.
Revenue recognition
Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services
in the ordinary course of the Company’s activities. Revenue is shown net of sales and value-added taxes,
returns, rebates and discounts.
Revenue is recognized when the amount of revenue and associated costs can be reliably measured, it is probable
that future economic benefits will flow to the Company and when specific criteria have been met for each of the
Company’s activities as described below.
40
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Sales of goods
Sales of goods are recognized when the Company has delivered products to the customer and there is no
unfulfilled obligation that could affect the customer’s acceptance of the products. Delivery of the products does
not occur until the products have been shipped to a specified location in accordance with the agreed-upon
shipping terms, the risk of obsolescence and loss have been transferred to the customer, and either the customer
has accepted the products in accordance with the sales contract, the acceptance provisions have lapsed, or the
Company has objective evidence that all criteria for acceptance have been satisfied. Customers have a right to
return faulty products, and some products are sold with volume discounts. Sales are recorded based on the price
specified in the sales contract, net of the estimated volume discounts and returns at the time of sale.
Accumulated experience is used to estimate and provide for the discounts and returns. The volume discounts are
assessed based on anticipated annual purchases.
Sales of services
Sales of services are recognized when the Company renders services.
Interest income
Interest income is recognized using the effective interest rate method.
Cash and cash equivalents
Cash and cash equivalents include cash on hand, cash in banks, other short-term highly liquid investments with
original maturities of three months or less, and bank indebtedness. Bank indebtedness is shown in current
liabilities on the consolidated statement of financial position. Interest is earned on cash and cash equivalents at
rates ranging from 0% to 3.5%. Interest is paid on bank indebtedness at rates ranging from 0.4% to 5.0%.
Short-term investments
Short-term investments include all highly liquid investments with original maturities greater than three months
but less than one year. Interest is earned on short-term investments at rates ranging from 2.0% to 8.0%.
Inventories
Inventories are valued at the lower of cost and net realizable value. Net realizable value is the estimated selling
price in the ordinary course of business, less applicable variable selling expenses. Cost of inventories is
determined as follows:
a)
raw materials principally using the weighted average method except for items that are not ordinarily
interchangeable, in which case specific identification of their individual costs is used; and
b) work in process, finished parts and finished goods using the raw material cost described in (a) plus
applicable direct labour and manufacturing overhead.
The value of obsolete or unmarketable inventory is based on the Company’s assessment of market conditions
for its products determined by historical usage, estimated future demand and, in some cases, the specific risk of
41
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
loss on specifically identified inventory. The writedown may be reversed if the circumstances which caused it
no longer exist.
Property, plant and equipment
Property, plant and equipment are valued at acquisition or manufacturing costs less any related government
assistance, accumulated depreciation and any accumulated impairment losses. Acquisition costs include any
expenditure that is directly related to the acquisition of the item. Manufacturing costs include direct material and
labour costs plus applicable manufacturing overheads. Borrowing costs directly attributable to the acquisition,
construction or production of assets that necessarily take a substantial period of time to be ready for their
intended use are added to the cost of those assets, until such time as those assets are ready for their intended use.
Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate,
only when it is probable that future economic benefits associated with the item will flow to the Company and
the cost of the item can be reliably measured. The carrying amount of a replaced part is expensed as the parts are
used. All other repairs and maintenance are charged to the consolidated statement of income during the period in
which they are incurred.
Depreciation of assets commences when the assets are ready for their intended use. The assets’ residual values
and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. Changes in
expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset
are accounted for by changing the depreciation period or method, as appropriate, and treated on a prospective
basis as a change in estimate.
Depreciation on the property, plant and equipment is determined principally using the following methods and
annual rates or terms:
Buildings
Machinery and equipment and
furniture and fixtures
Data processing equipment
Rolling stock
Leasehold improvements
Goodwill
Method
Declining balance
Declining balance
Straight-line
Declining balance
Straight-line
Rate/Term
4% to 5%
10% to 31%
3 years
30%
Over lease terms
Goodwill represents the excess of the purchase price over the fair value of the Company’s share of the net
identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill is carried at cost less
accumulated impairment losses.
Intangible assets
Purchased intangible assets relate primarily to patents, products, designs, customer lists, non-compete
agreements and computer software. Internally generated intangible assets relate to development costs. Research
42
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
and development costs are expensed as incurred unless the development costs meet the criteria for deferral. As
at February 28, 2014 and February 28, 2013, the Company had not capitalized any development costs.
Amortization expense is recognized in the consolidated statement of income in the expense category consistent
with the function of the intangible asset. The assets’ useful lives are reviewed, and adjusted if appropriate, at the
end of each reporting period or more frequently if events or circumstances occur that would indicate a change in
useful life. Changes in expected useful life or the expected pattern of consumption of future economic benefits
embodied in the asset are accounted for by changing the amortization period or method, as appropriate, and
treated on a prospective basis as a change in estimate. Amortization is determined principally using the
following methods and terms:
Patents, products and designs
Customer lists
Non-compete agreements
Computer software
Government assistance
Method
Straight-line
Straight-line
Straight-line
Straight-line
Term
15 years
10 years
5 years
1 to 3 years
The Company receives assistance in the form of investment tax credits (“ITCs”). ITCs are accounted for using
the cost reduction method. Under this method, assistance relating to eligible expenditures is deducted from the
cost of the related assets or related expenses in the period in which the expenditures are incurred, provided there
is reasonable assurance of realization.
Asset impairment
Assets that have an indefinite life (e.g. goodwill or indefinite life intangible assets) are not subject to
amortization and are tested annually for impairment, or more frequently if events or circumstances indicate there
may be impairment.
All other long-lived assets must be reviewed at the end of each reporting period in order to determine whether
there is an indication of possible impairment.
For the purposes of impairment testing, assets are grouped at the lowest levels for which there are separately
identifiable cash flows. A cash-generating unit (“CGU”) is the smallest group of assets that generates cash
inflows that are largely independent of the cash inflows from other assets or groups of assets. If an indication of
impairment exists, the recoverable amount of the CGU is estimated in order to determine the extent of the
impairment loss, if any. An impairment loss is recognized for the amount by which the asset’s carrying amount
exceeds its recoverable amount. If the recoverable amount of the CGU is less than the carrying amount, the
impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then
to the other assets of the CGU on a pro rata basis of the carrying amount of each asset in the CGU. The
recoverable amount is the greater of an asset’s fair value less costs to sell and its value in use. In assessing value
in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that
reflects current market assessments of the time value of money and the risks specific to the asset.
43
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Goodwill is allocated to CGUs for the purpose of impairment testing based on the level at which it is monitored
by management. The allocation is made to those CGUs that are expected to benefit from the business
combination in which the goodwill arose.
Non-current and non-financial assets, other than goodwill, that have previously suffered an impairment loss are
reviewed for possible reversal of the impairment at each reporting date.
Income taxes
The provision for income taxes for the year comprises current and deferred taxes. Tax is recognized in the
consolidated statement of income, except to the extent that it relates to items recognized in other comprehensive
income or directly in equity, in which case the tax is recognized in other comprehensive income or equity,
respectively.
Current income tax
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the
statement of financial position date in the countries where the Company generates taxable income. When an
asset is transferred between entities within the consolidated group, the difference between the tax rates of the
two entities is recognized as a tax expense in the period in which the transfer occurs. Current tax payable is
recognized for any taxes payable in the current period. Current tax liabilities are recognized for current tax to
the extent that it remains unpaid for current and prior periods.
Management periodically evaluates positions taken in tax returns with respect to situations in which applicable
tax regulation is subject to interpretation and establishes provisions where appropriate. Uncertain income tax
provisions are recorded when probable and are recorded at the Company’s best estimate of the amount.
Deferred income tax
Deferred income tax is recognized using the liability method on temporary differences arising between the tax
bases of assets and liabilities and their carrying amount in the consolidated financial statements. However, the
deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a
transaction other than a business combination that at the time of the transaction affects neither accounting nor
taxable profit or loss. Deferred income tax is determined using tax rates and laws that have been enacted or
substantively enacted by the statement of financial position date and are expected to apply when the related
deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets
are recognized only to the extent that it is probable that future taxable profit will be available against which the
temporary differences can be used. Deferred income tax assets are reviewed at each statement of financial
position date and amended to the extent that it is no longer probable that the related tax benefit will be realized.
Deferred income tax is provided on temporary differences arising on investments in subsidiary companies and
SPEs, except where the timing of the reversal of the temporary difference is controlled by the Company and it is
probable that the temporary difference will not reverse in the foreseeable future.
Current income tax assets and liabilities are offset when the Company has a legally enforceable right to offset
the recognized amounts and intends either to settle on a net basis or to realize the asset and settle the liability
simultaneously. Normally, the Company would only have a legally enforceable right to set off a current tax
asset against a current tax liability when they relate to income taxes levied by the same taxation authority and
44
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
the taxation authority permits the Company to make or receive a single net payment. Deferred income tax assets
and liabilities are offset when the Company has a legally enforceable right to set off current income tax assets
against current income tax liabilities and deferred tax assets and liabilities related to income taxes levied by the
same taxation authority on either: (1) the same taxable entity; or (2) different taxable entities which intend either
to settle current tax liabilities and assets on a net basis, or to realize assets and settle the liabilities
simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are
expected to be settled or recovered.
Provisions
Provisions are recognized when the Company has a present legal or constructive obligation as a result of a past
event, it is probable that an outflow of resources will be required to settle the obligation, and the amount has
been reliably estimated. Provisions are not recognized for costs that need to be incurred to operate in the future
or expected future operating losses.
Provisions are measured at the present value of the expenditures required to settle the obligation using a pre-tax
discount rate that reflects current market assessments of the time value of money and the risks specific to the
obligation.
Accrual for performance guarantees
Accrual for performance guarantees arise for possible late delivery and other contractual non-compliance
penalties or liquidated damages. It is recognized when the Company has a present legal or constructive
obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the
obligation, and the amount has been reliably estimated. Accrual for performance guarantees is not recognized
for costs that need to be incurred to operate in the future or expected future operating losses.
Accrual for performance guarantees is measured at the present value of the expenditures required to settle the
obligation using a pre-tax discount rate that reflects current market assessments of the time value of money and
the risks specific to the obligation.
Leases
Leases are classified as either finance or operating leases. Leases that transfer substantially all of the risks and
rewards of ownership of the asset to the Company are accounted for as finance leases. Finance leases are
capitalized at the commencement of the lease at the lower of the fair value of the leased asset and the present
value of the minimum lease payments. Assets acquired under a finance lease are depreciated over the shorter of
the period of expected use on the same basis as other similar assets and the lease term.
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are
classified as operating leases. Rental payments under operating leases are expensed in the consolidated
statement of income on a straight-line basis over the term of the lease.
Share-based compensation plans
Grants under the Company’s share-based compensation plans are accounted for in accordance with the fair
value based method of accounting. The Company operates a share-based compensation plan under which it
45
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
receives services from employees as consideration for share options. The fair value of the employee services
received in exchange for the grant of the options is amortized over the vesting period as compensation expense,
with a corresponding increase to contributed surplus. The total amount to be expensed is determined by
multiplying the number of options expected to vest with the fair value of one option as of the grant date as
determined by the Black-Scholes option pricing model. Remaining an employee of the Company for a specified
period of time is the only condition for vesting. Vesting typically occurs one-third per year over three years
from the grant date. This non-market performance condition is factored into the estimate of the number of
options expected to vest. If it becomes obvious that the number of options expected to vest differs from that
originally expected, the expense is adjusted accordingly.
When options are exercised, the Company issues new shares. The proceeds received, together with the amount
recorded in contributed surplus, net of any directly attributable transaction costs, are recorded in share capital.
Critical accounting estimates and judgments
The Company’s significant accounting policies as described above are essential to understanding the
Company’s results of operations, financial positions and cash flows. Certain of these accounting policies require
critical accounting estimates that involve complex and subjective judgments and the use of assumptions, some
of which may be for matters that are inherently uncertain and susceptible to change. The assumptions and
estimates used are based on parameters which are derived from the knowledge at the time of preparing the
financial statements and believed to be reasonable under the circumstances. In particular, the circumstances
prevailing at this time and assumptions as to the expected future development of the global and industry-specific
environment were used to estimate the Company’s future business performance. Where these conditions
develop differently than assumed and beyond the control of the Company, the actual results may differ from
those anticipated. These estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to
accounting estimates are recognized in the period in which the estimate is changed. There were no significant
changes made to critical accounting estimates during the past two fiscal years.
The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next fiscal year are addressed below.
Accounts receivable
The Company must report its accounts receivable at their net realizable value. This involves management
judgment and requires the Company to perform continuous evaluations of their collectability and to record an
allowance for doubtful accounts when required. In performing its evaluation, the Company analyzes the ageing
of accounts receivable, concentration of receivables by customer, customer creditworthiness and current
economic trends. Any change in the assumptions used could impact the carrying value of the accounts
receivable on the consolidated statement of financial position with a corresponding impact made to
administration costs on the consolidated statement of income.
Inventory
Inventories must be valued at the lower of cost and net realizable value. A writedown of inventory will occur
when its estimated market value less applicable variable selling expenses is below its carrying amount. This
involves significant management judgment and is based on the Company’s assessment of market conditions for
its products determined by historical usage, estimated future demand and, in some cases, the specific risk of loss
46
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
on specifically identified inventory. Any change in the assumptions used in assessing this valuation or selling
costs could impact the carrying amount of the inventory on the consolidated statement of financial position with
a corresponding impact made to cost of sales on the consolidated statement of income.
Provisions
Provisions must be established for possible product warranty expenses. The Company estimates its warranty
exposure by taking into account past experience as well as any known technical problems and estimates of costs
to resolve these issues. The Company estimates its exposure under these obligations based on an analysis of all
identified or expected claims. Any change in the assumptions used could impact the value of the provision on
the consolidated statement of financial position with a corresponding impact made to cost of sales on the
consolidated statement of income.
Asset impairment test
Assets that have an indefinite life, such as goodwill, are tested annually by the Company for impairment, or
more frequently if events or circumstances indicate there may be impairment. All other assets must be reviewed
by the Company at the end of each reporting period in order to determine whether there is an indication of
possible impairment. For the purposes of impairment testing, assets are grouped at the lowest levels for which
there are separately identifiable cash flows. A cash-generating unit (“CGU”) is the smallest group of assets that
generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. If
an indication of impairment exists, the Company estimates the recoverable amount of the CGU in order to
determine the extent of the impairment loss, if any. An impairment loss is recognized for the amount by which
the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the greater of an asset’s
fair value less costs to sell and its value in use. In assessing value in use, the Company estimates future cash
flows which are discounted to their present value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset. Any change in the assumptions used
could impact the carrying amount first of any goodwill allocated to the CGU and then to the other assets of the
CGU on a pro rata basis of the carrying amount of each asset in the CGU on the consolidated statement of
financial position with a corresponding impact made to the consolidated statement of income.
Income taxes
The Company must estimate its income taxes in each jurisdiction in which it operates. This involves assessing
the probability of using net operating losses against future taxable income as well as evaluating positions taken
in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. In the
event these assessments are changed, there would be an adjustment to income tax expense with a corresponding
adjustment to income tax balances on the consolidated statement of financial position.
Accounting standards and amendments adopted in the year
The following standards and amendments to existing standards were adopted by the Company on March 1,
2013. The adoption of these standards and amendments did not have a significant impact on the Company’s
financial statements.
(i)
IFRS 10, Consolidated Financial Statements, requires an entity to consolidate an investee when it has
power over the investee, is exposed, or has rights, to variable returns from its involvement with the
47
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
investee and has the ability to affect those returns through its power over the investee. Under previous
IFRS, consolidation was required when an entity had the power to govern the financial and operating
policies of an entity so as to obtain benefits from its activities. IFRS 10 replaced SIC-12, Consolidation -
Special Purpose Entities and parts of IAS 27, Consolidated and Separate Financial Statements.
(ii)
(iii)
(iv)
IFRS 11, Joint Arrangements, requires a venturer to classify its interest in a joint arrangement as a joint
venture or joint operation. Joint ventures are accounted for using the equity method of accounting whereas
for a joint operation the venturer recognizes its share of the assets, liabilities, revenue and expenses of the
joint operation. Under previous IFRS, entities had the choice to proportionately consolidate or equity
account for interests in joint ventures. IFRS 11 superseded IAS 31, Interests in Joint Ventures, and SIC-13,
Jointly Controlled Entities—Non-monetary Contributions by Venturers.
IFRS 12, Disclosure of Interests in Other Entities, establishes disclosure requirements for interests in other
entities, such as subsidiaries, joint arrangements, associates, and unconsolidated structured entities. The
standard carried forward existing disclosures and also introduced significant additional disclosure that
addressed the nature of, and risks associated with, an entity’s interests in other entities. See note 6 for
additional disclosures presented.
IFRS 13, Fair Value Measurement, is a comprehensive standard for fair value measurement and disclosure
for use across all IFRS standards. The standard clarifies that fair value is the price that would be received
to sell an asset, or paid to transfer a liability in an orderly transaction between market participants, at the
measurement date. Under previous IFRS, guidance on measuring and disclosing fair value was dispersed
among the specific standards requiring fair value measurements and did not always reflect a clear
measurement basis or consistent disclosures.
(v) There have been amendments to existing standards, including IAS 27, Separate Financial Statements
(“IAS 27”), and IAS 28, Investments in Associates and Joint Ventures (“IAS 28”). IAS 27 addressed
accounting for subsidiaries, jointly controlled entities and associates in non-consolidated financial
statements. IAS 28 had been amended to include joint ventures in its scope and to address the changes in
IFRS 10 – 13.
(vi)
IAS 1, Presentation of Financial Statements, has been amended to require entities to separate items
presented in other comprehensive income into two groups, based on whether or not items may be recycled
in the future. Entities that choose to present other comprehensive income items before tax are required to
show the amount of tax related to the two groups separately.
Accounting standards and amendments issued but not yet adopted
The following revised standard is effective for annual periods beginning on or after January 1, 2015 with earlier
application permitted. The Company has not yet assessed the impact of the standard or determined whether it
will early adopt it.
(i)
IFRS 9, Financial Instruments, was issued in November 2009 and addresses classification and
measurement of financial assets. It replaces the multiple category and measurement models in IAS 39,
Financial Instruments: Recognition and Measurement, for debt instruments with a new mixed
measurement model having only two categories: amortized cost and fair value through profit or loss. IFRS
9 also replaces the models for measuring equity instruments. Such instruments are either recognized at fair
48
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
value through profit or loss or at fair value through other comprehensive income. Where equity instruments
are measured at fair value through other comprehensive income, dividends are recognized in profit or loss
to the extent that they do not clearly represent a return of investment; however, other gains and losses
(including impairments) associated with such instruments remain in accumulated comprehensive income
indefinitely.
Requirements for financial liabilities were added to IFRS 9 in October 2010 and they largely carried
forward existing requirements in IAS 39, except that fair value changes due to credit risk for liabilities
designated at fair value through profit and loss are generally recorded in other comprehensive income.
3 Business acquisition
On April 29, 2011, the Company acquired a 70% voting interest in ABV Energy S.p.A., now Velan ABV S.p.A.
(“ABV”), an Italian manufacturer of engineered valves, actuators and control systems supplied to energy
markets. ABV was acquired for a maximum consideration of $50,833 (€34,300). The Company, using its own
cash resources, paid $38,384 (€25,900) on closing. Another $4,298 (€2,900) was required (“Holdback”) to be
paid on July 29, 2012. The $8,151 (€5,500) balance was to be paid to the extent of $2,223 (€1,500) on July 29,
2012 in the event that ABV had satisfied certain non-financial criteria, and the remaining $5,928 (€4,000) was
to be payable in two tranches based on ABV meeting certain earnings before interest, taxes, depreciation and
amortization (“EBITDA”) targets for the period from May 1, 2011 through February 28, 2014. The future
Holdback payment was discounted to its net present value using a discount rate of 2%. The future contingent
payments were recorded at their fair value, which was determined by discounting the amounts to their net
present value using a discount rate of 18%.
Purchase consideration
Cash paid on closing
Net present value of Holdback
Net present value of contingent payment – non-financial criteria
Net present value of contingent payment – financial criteria
Total net present value of purchase consideration
$
38,384
4,191
1,807
3,772
48,154
In April 2012, the required disbursement date of the contingent payment to be paid in the event that ABV had
satisfied certain non-financial criteria of $2,223 (€1,500) was extended to March 15, 2013. In addition, the
requirement that ABV satisfy the non-financial criteria was removed. As a result of these changes, the
Company recorded a fair value adjustment with respect to the applicable contingent payment of $196 to other
income during the fiscal year ended February 28, 2013.
On an annual basis at each statement of financial position date, the Company evaluated the likelihood that the
financial and non-financial criteria related to the contingent payments would be satisfied, based on current
projections prepared by local management which factor in the delays in the return to profitability of the
operation after the acquisition. Based on these annual evaluations, the Company determined that it would be
more likely than not that the financial criteria for the two tranches of the contingent payment based on ABV
meeting certain EBITDA targets would not be satisfied. As a result, the Company recorded a fair value
49
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
adjustment with respect to the applicable contingent payment of $2,248 to other income during the fiscal year
ended February 28, 2013.
The net present value of the Holdback and the fair value of the contingent payments have been recorded in other
liabilities. A foreign exchange gain of $407 was recognized in other income during the fiscal year ended
February 28, 2013.
For the fiscal year ended February 28, 2014, no fair value adjustments nor foreign exchange gains or losses were
recognized in other income on the outstanding Holdback and contingent payments. Furthermore, no such
amounts remained outstanding at the end of the current fiscal year.
4 Goodwill impairment analysis
Impairment test at February 28, 2013
In the context of its annual impairment testing at year-end, the Company completed its impairment analysis and
assessed the recoverability of the assets allocated to its various CGUs. The Company calculated the recoverable
amounts of its CGUs using valuation methods which were consistent with those used in prior years.
As a result of the impairment analysis, the Company determined that the carrying amount of the goodwill
associated with the CGU related to its subsidiary in Italy, ABV, exceeded its recoverable amount and,
accordingly, the Company recorded a goodwill impairment loss of $11,700 at February 28, 2013.
The recoverable amount was determined based on the fair value less costs to sell approach using a discounted
cash flow model. The significant key assumptions included forecasted cash flows based on updated financial
plans prepared by management covering a five-year period taking into consideration the following assumptions
and trends:
-
-
-
Expected EBITDA as a percentage of sales for the CGU of 7.3% in 2014, 11.8% in 2015, 14.4% in 2016,
16% in 2017 and 19% in 2018.
Expected working capital cash absorption ratio for the CGU of 19% of annual incremental sales increases.
Expected annual capital expenditure needs for the CGU of $500 in 2014, 2015 and 2016, and $1,000
thereafter.
The discounted cash flow model was established using a discount rate of 18.5% and a terminal growth rate of
2%.
This impairment charge was the result of actual results of the CGU coming in below the expectations at the time
of the acquisition. The reasons for these lower achieved results were due to a variety of factors, including a
business process integration that proved to be more difficult than planned, as well as profitability issues related
to the complexity of the manufactured products. In addition, the increasingly competitive landscape of the last
two years, particularly amongst upstream oil and gas flow control manufacturers in Italy, negatively impacted
margins.
Management based its selection of assumptions upon its assessment of the ability of the restructured CGU to
return to is pre-acquisition levels of growth and profitability, as well as its evaluation of the longer term
50
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
potential of its key end-user markets, particularly upstream oil and gas flow control. The margin assumptions
used were also generally comparable to those obtained in its other similar European project manufacturing
operations.
The following table provides a sensitivity analysis of the Company’s goodwill impairment loss for the period
assuming a one percentage point increase of the selected variables below. Note that this sensitivity analysis
assumes that all other assumptions and trends remain constant for each independent variable.
Increase in expected EBITDA as a percentage of sales
Increase in discount rate
Increase in terminal growth rate
Increase
(Decrease) in
impairment
loss
$
(2,866)
2,722
(1,951)
A one percentage point decrease of the selected variables below, assuming all other assumptions and trends
remain constant for each independent variable, would have the following impact on the goodwill impairment
loss:
Decrease in expected EBITDA as a percentage of sales
Decrease in discount rate
Decrease in terminal growth rate
Impairment test at July 16, 2013
Increase
(Decrease) in
impairment
loss
$
2,934
(3,132)
1,690
On July 16, 2013, the Company acquired the remaining 30% of ABV (see note 6(d)), which management
considered to be a triggering event to test the carrying value of the ABV assets for impairment.
The recoverable amount was determined based on the fair value less costs to sell approach using a discounted
cash flow model. The significant key assumptions included forecasted cash flows based on updated financial
plans prepared by management covering a five-year period taking into consideration the following assumptions
and trends:
- Expected earnings before interest, taxes, depreciation and amortization as a percentage of sales for the CGU
of 8.3% in 2014, 11.8% in 2015, 14.4% in 2016, 16% in 2017 and 19% in 2018.
- Expected working capital cash absorption ratio for the CGU of 19% of annual incremental sales increases.
- Expected annual capital expenditure needs for the CGU of $500 in 2014, 2015 and 2016, and $1,000
thereafter.
The discounted cash flow model was established using a discount rate of 19% and a terminal growth rate of 2%.
51
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Although the business process integration was still underway, management did not believe that the long-term
outlook for the business had changed at the time of this impairment test. As a result, and following the
impairment test performed at that date where the recoverable amount exceeded the carrying amount of $13,991
by $1,313, no impairment losses have been recorded at July 16, 2013 with respect to the carrying amount of the
goodwill associated with the CGU related to the Company’s ABV subsidiary.
The following table provides a sensitivity analysis of the Company’s recoverable amount of the goodwill
associated with the CGU related to its ABV subsidiary for the period assuming a one percentage point increase
of the selected variables below. Note that this sensitivity analysis assumes that all other assumptions and trends
remain constant for each independent variable.
Increase in expected EBITDA as a percentage of sales
Increase in discount rate
Increase in terminal growth rate
Decrease
(Increase) in
recoverable
amount
$
(4,519)
2,755
(1,594)
A one percentage point decrease of the selected variables below, assuming all other assumptions and trends
remain constant for each independent variable, would have the following impact on the recoverable amount of
the goodwill associated with the CGU related to its ABV subsidiary:
Decrease in expected EBITDA as a percentage of sales
Decrease in discount rate
Decrease in terminal growth rate
Impairment test at February 28, 2014
Decrease
(Increase) in
recoverable
amount
$
4,833
(3,114)
1,417
Despite the above impairment test triggered on July 16, 2013, the Company continued to carry out its annual
impairment testing at its year-end date. In the context of its annual impairment testing at year-end, the
Company completed its impairment analysis and assessed the recoverability of the assets allocated to its various
CGUs. The Company calculated the recoverable amounts of its CGUs using valuation methods which were
consistent with those used in prior years.
As a result of the impairment analysis, the Company determined that the recoverable amount exceeded the
carrying amount of the goodwill associated with the CGU related to its ABV subsidiary of $14,602 by $1,274
and, accordingly, no goodwill impairment loss was recorded at February 28, 2014.
The recoverable amount was determined based on the fair value less costs to sell approach using a discounted
cash flow model. The significant key assumptions included forecasted cash flows based on updated financial
plans prepared by management covering a five-year period taking into consideration the following assumptions
and trends:
52
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
-
-
-
Expected EBITDA as a percentage of sales for the CGU of 7% in 2015, 11.8% in 2016, 19.6% in 2017,
19.3% in 2018 and 19.2% in 2019.
Expected working capital cash absorption ratio for the CGU of 19% of annual incremental sales increases.
Expected annual capital expenditure needs for the CGU of $500 in 2015, 2016 and 2017, and $1,000
thereafter.
The discounted cash flow model was established using a discount rate of 18.5% and a terminal growth rate of
2%.
Management based its selection of assumptions upon its assessment of the ability of the restructured CGU to
return to is pre-acquisition levels of growth and profitability, as well as its evaluation of the longer term
potential of its key end-user markets, particularly upstream oil and gas flow control. The acquisition of the non-
controlling interest and the hiring of key senior management personnel were also factored into its assessments of
the ABV subsidiary. The margin assumptions used were also generally comparable to those obtained in its
other similar European project manufacturing operations.
The following table provides a sensitivity analysis of the Company’s recoverable amount of the goodwill
associated with the CGU related to its ABV subsidiary for the period assuming a one percentage point increase
of the selected variables below. Note that this sensitivity analysis assumes that all other assumptions and trends
remain constant for each independent variable.
Increase in expected EBITDA as a percentage of sales
Increase in discount rate
Increase in terminal growth rate
Decrease
(Increase) in
recoverable
amount
$
(4,224)
2,678
(1,864)
A one percentage point decrease of the selected variables below, assuming all other assumptions and trends
remain constant for each independent variable, would have the following impact on the recoverable amount of
the goodwill associated with the CGU related to its ABV subsidiary:
Decrease in expected EBITDA as a percentage of sales
Decrease in discount rate
Decrease in terminal growth rate
Decrease
(Increase) in
recoverable
amount
$
4,339
(3,036)
1,651
The Company also tested for impairment the carrying amount of the goodwill associated with the CGU related
to its French subsidiary, Velan S.A.S., and determined that the recoverable amount exceeded the carrying
amount of $10,736 by $39,408. Accordingly, no goodwill impairment loss was recorded for this CGU at
February 28, 2014.
53
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
5
Inventories
Raw materials
Work in process and finished parts
Finished goods
As at
February 28,
2014
$
As at
February 28,
2013
$
45,130
123,848
55,171
54,093
141,027
51,862
224,149
246,982
As a result of variations in the ageing of its inventories, the Company recognized an inventory provision for the
year of $3,245 (2013 – $2,382), net of reversals of $5,892 (2013 – $5,963).
The net book value of inventories pledged as security under the Company’s credit facilities amounted to $5,382
(2013 – $3,514).
6 Subsidiaries and transactions with non-controlling interests
a)
Interest in subsidiary companies and SPEs
Set out below are the Company’s principal subsidiaries and SPEs at February 28, 2014. Unless otherwise
stated, the subsidiaries and SPEs have share capital consisting solely of ordinary shares, which are held
directly by the Company, and the proportion of ownership interests held equals the voting rights held by the
Company. The country of incorporation or registration is also their principal place of business.
Name of entity
Country of
incorporation
% of ownership
interest held by the
Company
2014
2013
% of ownership
interest held by the
non-controlling
interests
2013
2014
Velan Valve Corp.
Velan Ltd.
Juwon Special Steel Co. Ltd.
Velan Valvulas Industrias, Lda.
Velan Valves Limited
Velan S.A.S.
Segault S.A.S.
Velan GmbH
Velan ABV S.p.A.
Velan Valvac Manufacturing Co. Ltd.
Velan Valve (Suzhou) Co. Ltd.
Velan Valves India Private Limited
U.S.A.
Korea
Korea
Portugal
U.K.
France
France
Germany
Italy
Taiwan
China
India
100
100
50
100
100
100
75
100
100
75
85
100
100
100
50
100
100
100
75
100
70
75
85
100
-
-
50
-
-
-
25
-
-
25
15
-
-
-
50
-
-
-
25
-
30
25
15
-
Principal Activities
Valve Manufacture
Valve Manufacture
Foundry
Valve Manufacture
Valve Manufacture
Valve Manufacture
Valve Manufacture
Valve Distribution
Valve Manufacture
Valve Manufacture
Valve Manufacture
Valve Manufacture
54
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
b) Significant restrictions
Cash and short-term investments held in certain Asian countries are subject to local exchange control
regulations. These regulations provide for restrictions on exporting capital from those countries, other than
through normal dividends. However, such restrictions do not have a significant impact on the Company’s
operations and treasury management.
c) Non-controlling interests
Set out below is summarized financial information for each subsidiary company and SPE that has non-
controlling interests that are material to the Company and for which the non-controlling interest is
recognized as equity rather than as a liability (see note 12(k)). The amounts disclosed for each subsidiary
are before intercompany eliminations.
Velan Valvac
Manufacturing Co. Ltd.
Velan ABV S.p.A.
2014
$
-
-
-
-
-
-
-
-
2013
$
24,084
23,873
211
40,711
15,511
25,200
25,411
3,160
Summarized statement of
financial position
As at February 28,
Current assets
Current liabilities
Current net assets
Non-current assets
Non-current liabilities
Non-current net assets
Juwon Special Steel Co. Ltd.
2013
$
2014
$
10,745
2,810
7,935
4,693
2,511
2,182
10,295
5,634
4,661
5,214
1,162
4,052
2014
$
4,796
1,481
3,315
1,923
173
1,750
2013
$
4,992
1,831
3,161
1,972
205
1,767
Net assets
10,117
8,713
5,065
4,928
Accumulated non-
controlling interest
5,531
3,972
1,523
1,529
55
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Summarized statement of comprehensive income
Juwon Special Steel
Co. Ltd.
Velan Valvac
Manufacturing Co.
Ltd.
2014
$
2013
$
2014
$
2013
$
Velan ABV S.p.A.
2014
$
2013
$
Sales
20,079
32,315
10,008
9,199
16,247
24,084
Net income (loss) for the year
1,234
3,672
552
520
108
(14,759)
Other comprehensive income (loss)
172
255
-
-
-
(1,122)
Total comprehensive income (loss) for the year
1,406
3,927
Net income (loss) allocated to non-controlling interest
617
1,836
Dividends paid to non-controlling interest
-
-
552
138
103
520
130
41
108
(15,881)
33
(977)
-
-
Summarized statement of cash flows
Juwon Special Steel
Co. Ltd.
Velan Valvac
Manufacturing Co.
Ltd.
2014
$
2013
$
2014
$
2013
$
Velan ABV S.p.A.
2014
$
2013
$
Cash flows from operating activities
1,615
3,950
485
112
2,810
(8,703)
Cash flows from investing activities
(224)
(1,253)
(37)
(14)
(438)
(1,452)
Cash flows from financing activities
973
(78)
(409)
(167)
(57)
8,947
Net increase (decrease) in cash and cash equivalents
2,364
2,619
39
(69)
2,315
(1,208)
The summarized statements of comprehensive income and cash flows above include the results of Velan
ABV S.p.A. for the 2014 fiscal year only for the period beginning March 1, 2013 and ending July 16, 2013,
the date at which the Company acquired this subsidiary company’s non-controlling interest (see note 6(d)).
It is for this reason that the summarized statement of financial position above excludes the financial
information for Velan ABV S.p.A. for the 2014 fiscal year.
d) Transactions with non-controlling interests
As a result of losses sustained in prior periods, the Company’s Italian subsidiary, ABV, was required to
recapitalize its share structure. Through the recapitalization, the existing share capital of ABV was
cancelled. New shares were issued solely to the Company through the conversion of existing shareholder
loans from the Company to ABV. In addition, the existing shareholder loans payable to the non-controlling
interest of ABV amounting to $1,403 (€1,071) were repaid through the recapitalization process. As a result
of the recapitalization, the Company acquired the remaining 30% of ABV to become its 100% shareholder
as of July 16, 2013.
56
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
7 Property, plant and equipment
At February 29, 2012
Cost
Accumulated depreciation
Year ended February 28, 2013
Beginning balance
Additions
Disposals
Depreciation
Internal transfers
Exchange differences
At February 28, 2013
Cost
Accumulated depreciation
Land
Buildings
M achinery &
equipment
Furniture &
fixtures
Data
processing
equipment
Rolling
stock
Leasehold
improvements
$
$
$
$
$
$
$
Total
$
11,480
44,468
123,735
-
(20,234)
(91,534)
11,480
24,234
32,201
6,827
(5,304)
1,523
4,234
(3,075)
1,159
2,021
(1,144)
877
2,438
195,203
(951)
(122,242)
1,487
72,961
11,480
171
(28)
-
-
284
11,907
24,234
4,211
-
(1,472)
3,164
(330)
29,807
32,201
21,771
(567)
(6,268)
(3,773)
(916)
42,448
1,523
1,159
837
-
(344)
580
(25)
761
-
(688)
-
(15)
2,571
1,217
877
360
(5)
(518)
29
248
991
1,487
341
-
(282)
-
143
72,961
28,452
(600)
(9,572)
-
(611)
1,689
90,630
11,907
50,964
136,462
-
(21,157)
(94,014)
11,907
29,807
42,448
7,960
(5,389)
2,571
4,875
(3,658)
1,217
2,584
(1,593)
991
2,897
217,649
(1,208)
(127,019)
1,689
90,630
Year ended February 28, 2014
Beginning balance
Additions
Disposals
Depreciation
Internal transfers
Exchange differences
11,907
271
-
-
-
(17)
29,807
1,878
(2)
42,448
12,855
153
(1,720)
(8,416)
-
(453)
-
(263)
46,777
2,571
903
(116)
(665)
-
594
1,217
1,043
(3)
(750)
-
5
3,287
1,512
991
389
(52)
(400)
-
18
946
1,689
614
(52)
(290)
-
451
90,630
17,953
(72)
(12,241)
-
335
2,412
96,605
12,161
29,510
At February 28, 2014
Cost
Accumulated depreciation
12,161
52,486
145,907
-
(22,976)
(99,130)
12,161
29,510
46,777
10,622
(7,334)
3,288
5,879
(4,367)
1,512
2,922
(1,976)
946
4,356
234,333
(1,945)
(137,728)
2,411
96,605
Depreciation expense of $12,241 (2013 – $9,572) is included in the consolidated statement of income: $10,865
(2013– $8,345) in ‘cost of sales’ and $1,376 (2013 – $1,227) in ‘administration costs’.
57
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
8
Intangible assets and goodwill
At March 1, 2012
Cost
Accumulated amortization
Year ended February 28, 2013
Beginning balance
Additions
Disposals and transfers
Amortization
Impairment loss
Exchange differences
At February 28, 2013
Cost
Accumulated amortization
Year ended February 28, 2014
Beginning balance
Additions
Disposals and transfers
Amortization
Impairment loss
Exchange differences
At February 28, 2014
Cost
Accumulated amortization
Goodwill
Computer
software
Patents,
products &
designs
Customer
lists
Non-compete
agreements
Other
Total
36,732
-
36,732
6,664
(5,134)
1,530
14,085
(1,402)
12,683
7,254
(606)
6,648
36,732
1,530
12,683
6,648
-
-
-
(11,700)
(952)
24,080
659
(6)
(859)
-
(32)
-
-
(860)
-
(341)
1,292
11,482
-
-
(696)
-
(182)
5,770
24,080
-
24,080
6,953
(5,661)
1,292
13,720
(2,238)
11,482
7,067
(1,297)
5,770
24,080
1,292
11,482
5,770
-
-
-
-
1,342
25,422
25,422
-
25,422
390
44
(753)
-
52
-
3
(889)
-
606
1,025
11,202
-
-
(720)
-
296
5,346
7,611
(6,586)
1,025
14,485
(3,283)
11,202
7,461
(2,115)
5,346
806
(135)
671
671
-
-
(155)
-
(20)
496
784
(288)
496
496
-
-
(160)
-
23
359
829
(470)
359
2,379
(1,798)
581
67,920
(9,075)
58,845
581
25
(165)
(345)
-
(22)
74
58,845
684
(171)
(2,915)
(11,700)
(1,549)
43,194
2,175
(2,101)
74
54,779
(11,585)
43,194
74
7
(73)
(3)
-
-
5
43,194
397
(26)
(2,525)
-
2,319
43,359
1,091
(1,086)
5
56,899
(13,540)
43,359
Amortization expense of $2,525 (2013 – $2,915) is included in the consolidated statement of income: $1,992 (2013 –
$2,220) in ‘cost of sales’ and $533 (2013 – $695) in ‘administration costs’.
58
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
9 Accounts payable and accrued liabilities
Trade accounts payable
Accrued liabilities
Other
10 Credit facilities
As at
February 28,
2014
$
As at
February 28,
2013
$
31,410
41,712
3,468
76,590
35,530
39,094
3,807
78,431
a) The Company and its U.S. subsidiary company, Velan Valve Corp., have the following credit facilities
available as at February 28, 2014:
Unsecured
Credit facilities available
Borrowing rates
$96,756 (CA$85,000 and US$20,000) (2013 – $105,412
(CA$85,000 and US$23,000)) (note 25)
Prime to prime + 0.75%
The above unsecured facilities are available by way of demand operating lines of credit, bank loans, letters
of credit, bankers’ acceptances, LIBOR loans, letters of guarantee and bank overdrafts. These facilities are
subject to annual renewal.
As at February 28, 2014, an amount of $21,699 (2013 – $31,567) was drawn against these unsecured credit
facilities in the form of demand operating lines of credit and bank overdrafts. An additional $7,881 (2013 –
$29,225) was drawn against these unsecured credit facilities in the form of letters of credit and letters of
guarantee.
In addition to the unsecured credit facilities above, the Company maintains a facility with Export
Development Canada of $40,000 for letters of credit and letters of guarantee. As at February 28, 2014,
$8,862 was drawn against this facility.
59
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
b) Foreign subsidiaries and SPEs have the following credit facilities available as at February 28, 2014:
Secured by corporate guarantees
Credit facilities available
Foreign subsidiaries
$66,489 (€40,822; £2,000; KW4,691,250; CNY
5,633; INR90,000) (2013 – $70,846
(€44,550; £4,875; KW4,725,500;
CNY5,127)) (note 25)
Borrowing rates
0.75% to 7.65%
(2013 – 0.57% to 6.25%)
Foreign SPEs
$6,184 (KW6,600,000)
(2013 – $7,837 (KW8,500,000)) (note 25)
3.11% to 5.00%
(2013 – 3.59% to 4.21%)
The above credit facilities are available by way of demand operating lines of credit, bank loans, guarantees,
letters of credit and foreign exchange forward contracts. The majority of these credit facilities have variable
borrowing rates based on LIBOR, EURIBOR, KORIBOR, EONIA or prime rate. The borrowing rates listed
above are the rates in effect as at February 28, 2014 and February 28, 2013. The terms of the above facilities
range from annual renewal to an indefinite term. The aggregate net book value of the assets pledged under the
above credit facilities amounted to $21,602 (2013 – $21,689).
As at February 28, 2014, an amount of $11,092 (2013 – $17,837) was drawn against these secured credit
facilities in the form of demand operating lines of credit and bank overdrafts. An additional $1,473 (2013 – nil)
was drawn against these secured credit facilities in the form of letters of credit and letters of guarantee.
11 Provisions
Balance – Beginning of year
Additional provisions
Used during the year
Exchange differences
Balance – End of year
As at
February 28,
2014
$
As at
February 28,
2013
$
6,345
2,969
(1,628)
374
8,060
5,149
2,845
(1,546)
(103)
6,345
The Company’s provisions consist entirely of warranties. The Company offers various warranties to the
purchasers of its valves. Management estimates the related provision for future warranty claims based on
historical warranty claim information, as well as recent trends that might suggest that past cost information may
differ from future claims. Factors that could impact the estimated claim information include the success of the
Company’s productivity and quality initiatives, as well as parts and labour costs.
60
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
12 Long-term debt
The Company
Unsecured bank loan (note 12(a))
French subsidiary
Unsecured bank loan (€166; 2013 – €246) (note 12(b))
Secured bank loan (€134; 2013 – €199) (note 12(c))
Secured bank loan (€342; 2013 – €1,018) (note 12(d))
Italian subsidiary
Unsecured bank loan (€757; 2013 – €850) (note 12(e))
Unsecured bank loan (€707; 2013 – €782) (note 12(f))
Unsecured state bank loan (€439; 2013 – €472) (note
12(g))
Korean SPE
Secured bank loan (KW24,000; 2013 – KW336,500) (note
12(h))
Secured bank loan (KW900,000; 2013 – nil) (note 12(i))
Unsecured bank loan (KW500,000; 2013 – nil) (note
12(j))
Other (note 12(k))
Less: Current portion
a) Unsecured bank loan
As at
February 28,
2014
$
As at
February 28,
2013
$
12,000
17,333
230
185
472
1,046
977
605
22
843
469
5,241
22,087
10,402
11,685
322
260
1,332
1,112
1,023
618
338
-
-
4,512
26,850
10,463
16,387
The unsecured bank loan of $12,000 bears interest at 2.74% and is repayable in monthly instalments of
$444, expiring in 2016.
b) Unsecured bank loan
The unsecured bank loan of $230 (€166) bears interest at 2.6% and is repayable in quarterly instalments of
$29, expiring in 2016
c) Secured bank loan
The secured bank loan of $185 (€134) bears interest at 2.7% and is repayable in monthly instalments of $8,
expiring in 2016. Certain machinery and equipment are pledged as collateral for this loan.
61
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
d) Unsecured bank loan
The unsecured bank loan of $472 (€342) bears interest at EURIBOR plus 1.35% and is repayable in
quarterly instalments of $253, expiring in 2014.
e) Unsecured bank loan
The unsecured bank loan of $1,046 (€757) bears interest at 2.91% and is repayable in monthly instalments,
expiring in 2021.
f) Unsecured bank loan
The unsecured bank loan of $977 (€707) bears interest at 4.90% and is repayable in monthly instalments,
expiring in 2021.
g) Unsecured state bank loan
The unsecured state bank loan of $605 (€439) is non-interest bearing and is repayable in semi-annual
instalments, expiring in 2020.
h) Secured Bank Loan
The secured bank loan of $22 (KW24,000) bears interest at 1.50% and is repayable in 2020. Certain land, a
building, and certain machinery and equipment are pledged as collateral for this loan.
i) Secured Bank Loan
The secured bank loan of $843 (KW900,000) bears interest at 3.10% and is repayable in 2015. Certain
land, a building, and certain machinery and equipment are pledged as collateral for this loan.
j) Unsecured Bank Loan
The unsecured bank loan of $469 (KW500,000) bears interest at 3.39% and is repayable in 2015.
k)
Included in Other is an amount of $4,049 (€2,931) (2013 – $3,608 (€2,758)) related to an unconditional put
option held by a minority shareholder in one of the Company’s subsidiary companies. This is recognized as
a liability instead of non-controlling interest. The liability is initially recognized as the non-controlling
interest’s share of the net identifiable assets of the subsidiary or SPE. Subsequently, the liability is carried
at the amount of the present value of estimated future cash flows discounted at the original effective rate.
Adjustments to the carrying value are recorded as interest expense in the consolidated statement of income.
62
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
l) The following is a schedule of future debt payments:
February 28, 2015
February 29, 2016
February 28, 2017
February 28, 2018
February 28, 2019
Subsequent years
$
10,402
7,201
1,786
363
376
1,959
22,087
The aggregate net book value of the assets pledged as collateral under long-term debt agreements amounted
to $3,217 (2013 – $6,911).
m) The carrying value of long-term debt approximates its fair value.
13 Capital stock
a) Authorized – in unlimited number
Preferred Shares, issuable in series
Subordinate Voting Shares
Multiple Voting Shares (five votes per share), convertible into Subordinate Voting Shares
b)
Issued
6,392,201 Subordinate Voting Shares (February 28,
2013 – 6,357,201) (notes 13(c) and (d))
15,566,567 Multiple Voting Shares
As at
February 28,
2014
$
As at
February 28,
2013
$
69,562
7,126
76,688
69,188
7,126
76,314
63
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
c) Pursuant to its Normal Course Issuer Bid, the Company is entitled to repurchase for cancellation a
maximum of 100,000 of the issued Subordinate Voting Shares of the Company, representing approximately
1.57% of the issued shares of such class as at October 10, 2013, during the ensuing 12-month period ending
October 21, 2014. During the year ended February 28, 2014, no Subordinate Voting Shares were
repurchased. During the year ended February 28, 2013, 225,200 Subordinate Voting Shares were
purchased for a cash consideration of $2,633 and cancelled. The amount by which the repurchase amount is
above the stated capital of the shares has been debited to contributed surplus.
d) The Company established a fixed share option plan (the “Share Option Plan”) in 1996, amended in fiscal
2007, to allow for the purchase of Subordinate Voting Shares by certain of its full-time employees,
directors, officers and consultants.
The subscription price for Subordinate Voting Shares granted under options is the greater of (i) the
weighted average trading price for such Subordinate Voting Shares for the five days preceding the date of
grant during which the Subordinate Voting Shares were traded on the Toronto Stock Exchange (“TSX”) or
(ii) the trading price for the Subordinate Voting Shares on the last day the Subordinate Voting Shares were
traded on the TSX immediately preceding the date of grant.
Under the Share Option Plan, the maximum number of Subordinate Voting Shares issuable from time to
time is a fixed maximum percentage of 5% of the aggregate of the Multiple Voting Shares and the
Subordinate Voting Shares issued and outstanding from time to time.
The granting of options is at the discretion of the Board of Directors which, at the date of grant, establishes
the term and vesting period. Vesting of options generally commences 12 months after the date of grant and
accrues annually over the vesting period provided there is continuous employment. The maximum term
permissible is 10 years.
A compensation cost of $23 (2013 – $58) was recorded in the consolidated statement of income and
credited to contributed surplus.
During the fiscal year ended February 28, 2014, 35,000 options were exercised resulting in the issuance of
35,000 Subordinate Voting Shares of the Company for proceeds of $374 which were credited to share
capital. No options were exercised in the prior fiscal year.
The table below summarizes the status of the Share Option Plan.
64
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Number
of shares Weighted average exercise price
Outstanding – February 29, 2012
Expired/forfeited
Outstanding – February 28, 2013
Exercisable – February 28, 2013
Outstanding – February 28, 2013
Exercised
Expired/forfeited
Outstanding – February 28, 2014
Exercisable – February 28, 2014
195,000
(15,000)
180,000
146,667
180,000
(35,000)
(95,000)
50,000
33,334
Weighted
average
contractual
life in
months
28.1
-
16.8
$11.94 (CA$11.81)
$10.67 (CA$11.00)
$11.51 (CA$11.88)
$11.01 (CA$11.36)
$11.51 (CA$11.88)
16.8
$10.70 (CA$11.00)
$10.70 (CA$11.00)
-
-
$12,78 (CA$14.15)
29.0
$12.78 (CA$14.15)
14 Foreign exchange
Foreign exchange gains (losses) realized on the translation of foreign currency balances, transactions and the
fair value of foreign currency financial derivatives and embedded derivatives during the period are included in
sales and cost of sales and amounted to:
Sales
Cost of sales
2014
$
(250)
(907)
2013
$
1,219
(1,566)
65
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
15 Cost of sales
Change in inventories of finished goods and work in progress
Raw materials and consumables used
Employee expense (note 17)
Depreciation and amortization (note 20)
Movement in inventory provision – net (note 5)
Foreign exchange (note 14)
Other production overhead costs
16 Administration costs
Employee expense (note 17)
Scientific research investment tax credit (note 17)
Commissions
Freight to customers
Professional fees
Movement in bad debt provision (note 25)
Depreciation and amortization (note 19)
Other
17 Employee expense
Wages and salaries
Social security costs
Scientific research investment tax credit (note 18)
Share-based compensation (note 13(d))
Other
66
2014
$
2013
$
15,364
190,382
96,608
12,857
3,245
907
38,748
9,304
216,897
99,864
10,565
2,382
1,566
46,097
358,111
386,675
2014
$
43,310
(4,028)
7,095
6,411
11,929
(638)
1,909
21,155
87,143
2014
$
99,518
33,936
(4,028)
23
6,441
2013
$
44,288
(3,684)
10,821
7,109
14,186
393
1,922
15,950
90,985
2013
$
103,049
34,652
(3,684)
58
6,393
135,890
140,468
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
18 Research and development expenses
Research and development expenses are included in cost of sales and administration costs and consist of the
following:
Research and development expenditures
Less: Scientific research and development investment tax credit
2014
$
8,844
4,028
4,816
2013
$
9,238
3,684
5,554
19 Depreciation and amortization costs
Depreciation and amortization costs are included in cost of sales and administration costs and consist of the
following:
Depreciation of property, plant and equipment
Amortization of intangible assets
20 Income taxes
Current taxes:
Current tax on profits for the year
Adjustments in respect of prior years
Deferred taxes:
Origination and reversal of timing differences
Income tax expense
2014
$
12,241
2,525
14,766
2014
$
10,289
349
10,638
1,121
11,759
2013
$
9,572
2,915
12,487
2013
$
6,960
(351)
6,609
(1,325)
5,284
The taxes on the Company’s income before taxes differ from the amount that would arise using the statutory tax
rate applicable to income of the consolidated entities as follows:
67
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Income before tax at statutory rate of 26.90% (2013 – 26.90%)
11,503
3,233
2014
$
2013
$
Tax effects of:
Difference in statutory tax rates in foreign jurisdictions
Non-deductible (taxable) foreign exchange loss (gain)
Non-deductible goodwill impairment loss
Non-taxable income on fair value adjustment of proceeds payable
Benefit attributable to a financing structure
Other
Income tax expense
The analysis of deferred tax assets and deferred tax liabilities is as follows:
Deferred income tax assets:
To be realized after more than 12 months
To be realized within 12 months
Deferred income tax liabilities:
To be realized after more than 12 months
To be realized within 12 months
Net deferred income tax asset
The movement of the net deferred income tax asset account is as follows:
Balance – Beginning of year
Recovery (Provision) to consolidated statement of income
Exchange differences
Balance – End of year
1,025
(4)
-
-
(1,309)
544
11,759
2014
$
6,465
4,941
(7,772)
(1,498)
2,136
2014
$
3,191
(1,121)
66
2,136
1,044
(314)
3,147
(657)
(1,178)
9
5,284
2013
$
6,100
5,126
(7,742)
(293)
3,191
2013
$
1,882
1,325
(16)
3,191
68
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
The significant components of the net deferred income tax asset are as follows:
Property, plant and equipment
Intangible assets
Non-deductible provisions and reserves
Investment tax credits
Inventories
Non-capital loss carryforwards
Other
2014
$
(3,832)
(5,254)
3,491
(909)
4,324
2,399
1,917
2,136
2013
$
(3,830)
(5,512)
5,202
(394)
5,672
2,283
(230)
3,191
The Company did not recognize deferred income tax assets of $606 (2013 – $294) in respect of non-capital
losses amounting to $1,782 (2013 – $989) that can be carried forward to reduce taxable income in future years.
These losses expire between 2020 and 2022.
The Company did not recognize deferred income tax assets of $276 (2013 – $276) in respect of capital losses
amounting to $2,051 (2013 – $2,051) that can be carried forward indefinitely against future taxable capital
gains.
Deferred tax liabilities of $7,009 (2013 – $6,412) have not been recognized for the withholding tax and other
taxes that would be payable on the unremitted earnings of certain subsidiaries. Such amounts are not expected to
reverse in the foreseeable future. Unremitted earnings as at February 28, 2014 totalled $292,798 (2013 –
$268,515)
69
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
21 Earnings per share
a) Basic
Basic earnings per share is calculated by dividing the net income attributable to the Subordinate and
Multiple Voting shareholders by the weighted average number of Subordinate and Multiple Voting Shares
outstanding during the year.
2014
2013
Net income attributable to Subordinate and Multiple Voting
shareholders
$29,400
$6,169
Weighted average number of Subordinate and Multiple Voting Shares
outstanding
Basic earnings per share
b) Diluted
21,936,714
22,019,568
$1.34
$0.28
Diluted earnings per share is calculated by adjusting the weighted average number of Subordinate and
Multiple Voting Shares outstanding to assume conversion of all dilutive potential Subordinate and Multiple
Voting Shares. The Company has one category of dilutive potential Subordinate and Multiple Voting
Shares: stock options. For the stock options, a calculation is done to determine the number of Subordinate
and Multiple Voting Shares that could have been acquired at fair value (determined as the average market
share price of the Company’s outstanding Subordinate and Multiple Voting Shares for the period), based
on the exercise prices attached to the stock options. The number of Subordinate and Multiple Voting Shares
calculated above is compared with the number of Subordinate and Multiple Voting Shares that would have
been issued assuming exercise of the stock options.
2014
2013
Net income attributable to Subordinate and Multiple Voting
shareholders
$29,400
$6,169
Weighted average number of Subordinate and Multiple Voting Shares
outstanding
Adjustments for stock options
Weighted average number of Subordinate and Multiple Voting Shares
for diluted earnings per share
Diluted earnings per share
21,936,714
-
22,019,568
11,995
21,936,714
22,031,563
$1.34
$0.28
70
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
22 Commitments and contingencies
a)
In the normal course of business, the Company issues performance bond guarantees related to product
warranty and on-time delivery as well as advance payment guarantees and bid bonds. As at February 28,
2014, the aggregate maximum value of these guarantees, if exercised, amounted to $73,934 (2013 –
$84,762). The guarantees expire as follows:
February 28, 2015
February 29, 2016
February 28, 2017
February 28, 2018
February 28, 2019
Subsequent years
$
34,443
10,037
16,220
6,477
6,234
523
73,934
b) The Company has outstanding purchase commitments with foreign suppliers, due within one year,
amounting to $4,452 (2013 – $7,899), which are covered by letters of credit.
c) Future minimum payments under operating leases (related mainly to premises and machinery) are
as follows:
February 28, 2015
February 29, 2016
February 28, 2017
February 28, 2018
February 28, 2019
Subsequent years
$
1,282
1,118
963
924
898
837
6,022
d) Two of the Company’s U.S. subsidiaries have been named as defendants in a number of asbestos-related
legal proceedings pertaining to products they formerly sold. Management believes it has a strong defence,
and the subsidiaries have previously been dismissed from a number of similar cases. Because of the many
uncertainties inherent in predicting the outcome of these proceedings, as well as the course of asbestos
litigation in the United States, management believes that it is not possible to make an estimate of the
subsidiaries’ asbestos liability. Accordingly, no provision has been set up in the accounts.
During the year ended February 28, 2014, legal and related costs for these matters amounted to $5,472
(2013 – $8,763).
e) Lawsuits and proceedings or claims arising from the normal course of operations are pending or threatened
against the Company. Although at this time it is not possible to determine the outcome based on the facts
currently known, the Company does not believe that the ultimate outcome will have a material adverse
effect on its financial position, results of operations or liquidity. No provision has been set up in the
accounts.
71
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
23 Related party transactions
Transactions and balances with related parties occur in the ordinary course of business. Related party
transactions and balances not otherwise disclosed separately in these consolidated financial statements are as
follows:
Affiliated company owned by certain relatives of controlling
shareholder
Purchases – Material components
Sales – Material components
Amounts charged by an affiliated company in which
a relative of the controlling shareholder
owns a 50% interest
Computer consulting
Amount charged by the controlling shareholder to one of the
Company’s subsidiaries and certain of its executives
Rent based on weekly usage
Accounts receivable
Affiliated companies
Amount charged by minority shareholders of the Company’s Italian
subsidiary (up to the acquisition of the remaining 30% - note 6d))
Rent for manufacturing facilities
Accounts payable and accrued liabilities
Affiliated companies
Controlling shareholder
Key management1 compensation
Salaries and other short-term benefits
Share-based compensation
2014
$
1,889
104
4
25
32
271
174
21
3,841
23
2013
$
1,909
168
17
25
9
680
296
4
3,581
58
Short-term loans payable to minority shareholders of the Company’s
Italian subsidiary
€1,071 Short term loans, bearing interest at 5%, repayable in
May 2013. These loans were repaid in July 2013 in
conjunction with the acquisition of non-controlling interest
(note 6(d))
Interest expense on short-term loans
-
33
1,401
65
1 Key management includes directors (executive and non-executive) and certain senior management.
72
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2013 and February 29, 2012
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
24 Segment reporting
Geographic distribution of sales and assets:
Canada
$
United
States
$
France
$
Italy
$
Other
$
February 28, 2014
Consolidation
Adjustment Consolidated
$
$
71,899
108,673
91,160
271,732
42,365
169
261,928
304,462
116,343
-
33,383
58,630
48,538
895
149,726
108,063
8,693
-
34,886
43,579
13,612
11,522
165,934
191,068
1,011
36,834
839
38,684
5,279
31,597
30,499
67,375
12,779
34,550
55,764
(182,041)
260,662
228,595
-
103,093
(182,041)
489,257
26,663
71
108,026
(7)
-
(117,083)
96,605
43,359
484,190
134,760
(117,090)
624,154
Canada
$
United
States
$
France
$
Italy
$
Other
$
February 28, 2013
Consolidation
Adjustment Consolidated
$
$
54,284
96,099
103,085
253,468
41,628
116
263,309
305,053
124,631
-
31,492
49,013
71,597
143
156,123
120,753
6,514
-
34,638
41,152
11,841
11,307
161,205
184,353
48
42,557
1,239
43,844
5,270
31,720
35,571
72,561
13,979
48,366
61,591
(197,550)
241,955
258,619
-
123,936
(197,550)
500,574
25,397
51
107,401
(20)
-
(116,174)
90,630
43,194
485,950
132,849
(116,194)
619,774
Sales
Customers -
Domestic
Export
Intercompany (export)
Total
Property, plant and equipment
Intangible assets and goodwill
Other identifiable assets
Total identifiable assets
Sales
Customers -
Domestic
Export
Intercompany (export)
Total
Property, plant and equipment
Intangible assets and goodwill
Other identifiable assets
Total identifiable assets
73
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and February 28, 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
25 Financial risk management
The Company’s activities expose it to a variety of financial risks: market risk (including currency risk, cash flow
interest rate risk and fair value interest rate risk), credit risk and liquidity risk. The Company’s overall financial
risk management program focuses on mitigating unpredictable financial market risks and their potential adverse
effects on the Company’s financial performance.
The Company’s financial risk management is generally carried out by the corporate finance team, based on
policies approved by the Board of Directors. The identification, evaluation and hedging of the financial risks are
the responsibility of the corporate finance team in conjunction with the finance teams of the Company’s
subsidiary companies and SPEs. The Company uses derivative financial instruments to hedge certain risk
exposures. Use of derivative financial instruments is subject to a policy which requires that no derivative
transaction be entered into for the purpose of establishing a speculative or leveraged position (the corollary
being that all derivative transactions are to be entered into for risk management purposes only).
Overview
The Company’s financial instruments and the nature of risks which they may be subject to are set out in the
following table:
Risks
Market
Financial instrument
Currency
Interest rate
Credit
Liquidity
Cash and cash equivalents
Short-term investments
Accounts receivable
Derivative assets
Bank indebtedness
Short-term bank loans
Accounts payable and accrued liabilities
Customer deposits
Dividend payable
Accrual for performance guarantees
Derivative liabilities
Long-term debt
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Market risk
Currency risk
Currency risk on financial instruments is the risk that the fair value of future cash flows of a financial instrument
will fluctuate because of changes in foreign exchange rates. The Company operates internationally and is
exposed to foreign exchange risk arising from various currency exposures. Currency risk arises when future
commercial transactions and recognized assets and liabilities are denominated in a currency other than a
company’s functional currency. The Company has operations with different functional currencies, each of
which will be exposed to currency risk based on its specific functional currency.
74
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and February 28, 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
When possible, the Company matches cash receipts in a foreign currency with cash disbursements in that same
currency. The remaining anticipated net exposure to foreign currencies is hedged. To hedge this exposure, the
Company uses foreign currency derivatives, primarily foreign exchange forward contracts. These derivatives are
not designated as hedges for accounting purposes.
The amounts outstanding as at February 28, 2014 and February 28, 2013 are as follows:
Range of exchange rates
Gain (loss)
(In thousands of U.S. dollars)
Notional amount
(In thousands of indicated currency)
February 28,
2014
February 28,
2013
February 28,
2014
$
February 28,
2013
$
February 28,
2014
February 28,
2013
Foreign exchange forward contracts
Sell US$ for CA$ – 0 to 12 months
1.04-1.12
Sell US$ for € – 0 to 12 months
1.29-1.36
Buy US$ for € – 0 to 12 months
1.34-1.36
Sell US$ for ₤ – 0 to 21 months
1.52
Sell US$ for KW – 0 to 12 months 1,070-1,075
Sell € for US$ – 0 to 12 months
1.31-1.37
Buy € for US$ – 0 to 12 months
-
Buy £ for US$ – 0 to 12 months
1.61-1.68
0.97-1.04
1.28-1.43
1.28-1.41
1.52
-
1.25-1.35
1.26
1.51-1.61
(1,275)
192
(14)
130
94
(133)
-
3
(951) US$43,057
US$8,498
(192)
US$483
1
US$1,315
(6)
US$1,348
-
€9,026
103
-
67
£2,746
(62)
US$43,245
US$8,664
US$33
US$1,485
-
€30,693
€1,420
£889
Foreign exchange forward contracts are contracts whereby the Company has the obligation to sell or buy the
currencies at the strike price. The fair value of the foreign currency instruments is recorded in the consolidated
statement of income and reflects the estimated amounts the Company would have paid or received to settle these
contracts as at the financial position date. Gains are recorded as derivative assets and losses as derivative
liabilities on the consolidated statement of financial position.
Cash flow and fair value interest rate risk
The Company’s exposure to interest rate risk is related primarily to its credit facilities, long-term debt and cash
and cash equivalents. Items at variable rates expose the Company to cash flow interest rate risk, and items at
fixed rates expose the Company to fair value interest rate risk. The Company’s long-term debt and credit
facilities predominantly bear interest, and its cash and cash equivalents earn interest at variable rates. An
assumed 0.5% change in interest rates would have no significant impact on the Company’s net income or cash
flows.
Credit risk
Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet
its contractual obligations. Credit risk arises primarily from the Company’s trade accounts receivable.
The Company’s credit risk related to its trade accounts receivable is concentrated. As at February 28, 2014,
two (2013 – three) customers accounted for more than 5% each of its trade accounts receivable, of which one
customer accounted for 5.4% (2013 – 6.2%), and the Company’s ten largest customers accounted for 36.5%
(2013 – 43.1%).
75
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and February 28, 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
In order to mitigate its credit risk, the Company performs a continual evaluation of its customers’ credit and
performs specific evaluation procedures on all its new customers. In performing its evaluation, the Company
analyzes the ageing of accounts receivable, historical payment patterns, customer creditworthiness and current
economic trends. A specific credit limit is established for each customer and reviewed periodically. An
allowance for doubtful accounts is recorded when, based on management’s evaluation, the collection of an
account receivable is not reasonably certain.
The Company is also exposed to credit risk relating to derivative financial instruments, cash and cash
equivalents and short-term investments, which it manages by dealing with highly rated financial institutions.
The Company’s primary credit risk is limited to the carrying value of the trade accounts receivable and gains on
derivative assets.
The table below summarizes the ageing of trade accounts receivable as at:
Current
Past due 0 to 30 days
Past due 31 to 90 days
Past due more than 90 days
Less: Allowance for doubtful accounts
Trade accounts receivable
Other receivables
Total accounts receivable
As at
February 28,
2014
$
As at
February 28,
2013
$
93,053
13,251
9,375
9,039
124,718
917
123,801
5,177
97,741
10,351
8,702
10,793
127,587
1,525
126,062
8,312
128,978
134,374
The table below summarizes the movements in the allowance for doubtful accounts:
As at
February 28,
2014
$
As at
February 28,
2013
$
1,525
767
(1,237)
(168)
30
917
1,144
916
(472)
(50)
(13)
1,525
Balance – Beginning of year
Bad debt expenses
Recoveries of trade accounts receivable
Write-off of trade accounts receivable
Foreign exchange
Balance – End of year
76
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and February 28, 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due.
The Company manages its liquidity risk by continually monitoring its future cash requirements. Cash flow
forecasting is performed in the operating entities and aggregated by the Company’s corporate finance team. The
Company’s policy is to maintain sufficient cash and cash equivalents and available credit facilities in order to
meet its present and future operational needs.
The following tables present the Company’s financial liabilities identified by type and future contractual dates
of payment as at:
Total
$
22,087
76,590
66,842
33,842
32,792
1,501
Total
$
26,850
78,431
76,682
28,525
50,864
1,380
Less than
1 year
$
10,402
76,590
66,842
33,842
32,792
1,501
Less than
1 year
$
10,463
78,431
76,682
28,525
50,864
1,380
As at February 28, 2014
1 to 3
Years
$
8,987
4 to 5
Years
$
739
After
5 years
$
1,959
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
As at February 28, 2013
1 to 3
Years
$
12,216
4 to 5
Years
$
2,013
After
5 years
$
2,158
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Long-term debt
Accounts payable and accrued
liabilities
Customer deposits
Accrual for performance guarantees
Bank indebtedness and short-term
bank loans
Derivative liabilities
Long-term debt
Accounts payable and accrued
liabilities
Customer deposits
Accrual for performance guarantees
Bank indebtedness and short-term
bank loans
Derivative liabilities
Fair value of financial instruments
The fair value hierarchy has the following levels:
Level 1 – quoted market prices in active markets for identical assets or liabilities;
Level 2 – inputs other than quoted market prices included in Level 1 that are observable for the asset
or liability, either directly (as prices) or indirectly (derived from prices); and
Level 3 – unobservable inputs such as inputs for the asset or liability that are not based on observable
market data. The level in the fair value hierarchy within which the fair value measurement is
categorized in its entirety is determined on the basis of the lowest level input that is
significant to the fair value measurement in its entirety.
77
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and February 28, 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
The fair value of financial assets and financial liabilities measured on the consolidated statements of financial
position are as follows:
Financial position classification
and nature
Assets
Derivative assets
Liabilities
Derivative liabilities
Financial position classification
and nature
Assets
Derivative assets
Liabilities
Derivative liabilities
As at February 28, 2014
Level 1
$
Level 2
$
Level 3
$
-
-
498
1,501
-
-
As at February 28, 2013
Level 1
$
Level 2
$
Level 3
$
-
-
340
1,380
-
-
Total
$
498
1,501
Total
$
340
1,380
Fair value measurements of the Company’s derivative assets and liabilities are classified under Level 2 because
such measurements are determined using published market prices or estimates based on observable inputs such
as interest rates, yield curves, and spot and future exchange rates. The carrying value of the Company’s
financial instruments is considered to approximate fair value, unless otherwise indicated.
26 Capital management
The Company’s capital management strategy is designed to maintain strong liquidity in order to pursue its
organic growth strategy, undertake selective acquisitions and provide an appropriate investment return to its
shareholders while taking a conservative approach to financial leveraging.
The Company’s financial strategy is designed to meet the objectives stated above and to respond to changes in
economic conditions and the risk characteristics of underlying assets. In order to maintain or adjust its capital
structure, the Company may issue or repurchase shares, raise or repay debt, vary the amount of dividends paid
to shareholders or undertake any other activities it considers appropriate under the circumstances.
The Company monitors capital on the basis of its total debt-to-equity ratio. Total debt consists of all interest-
bearing debt, and equity is defined as total equity.
78
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and February 28, 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
The total debt-to-equity ratio was as follows:
Bank indebtedness
Short-term bank loans
Current portion of long-term debt
Long-term debt
Total debt
Equity
Total debt-to-equity ratio
As at
February 28,
2014
$
As at
February 28,
2013
$
31,545
1,247
10,402
11,685
54,879
48,580
2,284
10,463
16,387
77,714
359,119
328,173
15.3% 23.7%
The Company’s objective is to conservatively manage the total debt-to-equity ratio and to maintain funding
capacity for potential opportunities.
The Company’s financial objectives and strategy as described above have remained unchanged since the last
reporting period. These objectives and strategies are reviewed annually or more frequently if the need arises.
The Company is in compliance with all covenants related to its debt and credit facilities, and is not subject to
any capital requirements imposed by a regulator.
27 Adjustments to reconcile net income to cash provided from operating activities
2014
$
12,241
2,525
1,121
-
23
(296)
9
-
-
(37)
304
2013
$
9,572
2,915
(1,325)
11,700
58
(134)
663
(2,444)
(407)
2,169
622
15,890
23,389
Depreciation of property, plant and equipment
Amortization of intangible assets
Deferred income taxes
Goodwill impairment loss (note 4)
Share-based compensation expense
Gain on disposal of property, plant and equipment
Interest accretion on proceeds payable (note 3)
Income from fair value adjustment of proceeds payable (note 3)
Unrealized foreign exchange gain on proceeds payable (note 3)
Net change in derivative assets and liabilities
Net change in other liabilities
79
Velan Inc.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2014 and February 28, 2013
(in thousands of U.S. dollars, excluding number of shares and per share amounts)
28 Changes in non-cash working capital items
Accounts receivable
Inventories
Income taxes recoverable
Deposits and prepaid expenses
Accounts payable and accrued liabilities
Income tax payable
Customer deposits
Provisions
Accrual for performance guarantees
2014
$
5,443
23,033
2,226
1,011
(1,825)
1,339
(9,754)
1,730
5,363
2013
$
(23,266)
11,313
1,943
156
(3,778)
335
(10,189)
1,156
6,619
28,566
(15,711)
80
Directors and officers
Corporate directors
A. K. Velan
Founder and Executive Chairman of the Board
P. Velan
R. Velan
T. Velan
C. Hooper
Director
Director
Director
Director
J. Latendresse
Director
K. MacKinnon
Director
W. Sheffield
Director
Corporate officers
A. K. Velan
Founder and Executive Chairman of the Board
T. Velan
I. Velan
W. Maar
J. Ball
President and Chief Executive Officer
Executive Vice-President
Executive Vice-President, International Sales and Overseas Operations
Chief Financial Officer
S. Cherlet
Chief Operations Officer
V. Apostolescu
Vice-President, Quality Assurance
S. Bruckert
Vice-President, Human Resources and General Counsel, Corporate Secretary
J. Del Buey
Vice-President, Severe Service Applications
P. Dion
P. Lee
G. Perez
C. Pogue
Vice-President, Canadian Sales
Vice-President, Sales - United States (Eastern Division)
Vice-President, Engineering
Vice-President, Sales - United States (Western Division)
G. Sabourin
Vice-President, Treasurer and Financial Systems
A. Smith
Vice-President, Procurement and Overseas Manufacturing
R. Sossoyan
Vice-President, Global Financial Reporting
N. Tarfa
R. Velan
Vice-President, Materials and Process Technologies
Vice-President, Distribution
G. Zarifah
Vice-President, Global Capital Investments and Production Technology
81
Shareholder Information
Head office
7007 Cote de Liesse
Montreal, Quebec, Canada H4T 1G2
Website
www.velan.com
Investor relations
John D. Ball
Chief Financial Officer
7007 Cote de Liesse, Montreal, Quebec, Canada H4T 1G2
Tel.: (514) 748-7743, Ext. 5537
Fax: (514) 908-0180
Auditors
PricewaterhouseCoopers LLP
Transfer agent
CST Trust Company
Shares outstanding as at February 28, 2014
6,392,201 Subordinate Voting Shares
15,566,567 Multiple Voting Shares
Listing
Symbol: VLN
Price range
$16.51
High
$10.90
Low
Closing on February 28, 2014: $16.22
Annual meeting
The Annual Meeting of Shareholders will be held July 10, 2014,
at 3:00 p.m. at the company’s head office:
Velan Inc.
7007 Cote de Liesse,
Montreal, Quebec, Canada H4T 1G2
82
Velan worldwide
Head Office
An extensive global network
Montreal, Canada
Velan Inc.
Manufacturing
- North America
Plant 1
• 17 production facilities
• 5 plants in North America
• 6 plants in Europe
• 6 plants in Asia
• 5 stocking and distribution centers
• Hundreds of distributors worldwide
• Over 60 service shops worldwide
Manufacturing
- Europe
Plant
Manufacturing
- Asia
Plant 1
Distribution centers
Stocking and distribution
Montreal, Canada
Velan Inc.
Plant 2 and 7
Lyon, France
Velan SAS
Plant
Ansan City, South Korea
Velan Ltd.
Willich, Germany
Velan GmbH
Plant 2
Stocking and distribution
Montreal, Canada
Velan Inc.
Plant 4 and 6
Mennecy, France
Segault SA
Plant
Ansan City, South Korea
Velan Ltd.
Granby, Canada
VelCAN
Plant 3
Stocking and distribution
Granby, Canada
Velan Inc.
Plant 5
Leicester, UK
Velan Valves Ltd.
Plant
Ansan City, South Korea
Velan Ltd.
Benicia, CA, USA
VelCAL
Plant
Stocking and distribution
Montreal, Canada
Velan Inc.
Plant 3
Lisbon, Portugal
Velan Valvulas Industriais, Lda.
Taichung, Taiwan
Velan-Valvac
Marietta, GA, U.S.A.
VelEAST
Plant 1
Plant
Stocking and distribution
Williston, VT, USA
Velan Valve Corp.
Lucca, Italy
Velan ABV S.p.A
Plant 2
Suzhou, China
Velan Valve (Suzhou) Co., Ltd.
Houston, TX, U.S.A.
VelTEX
Plant
Lucca, Italy
Velan ABV S.p.A
Coimbatore, India
Velan Valves India Private Ltd.
A world leader in industrial valve
design and manufacturing
supplying to:
• Fossil, nuclear, and
cogeneration power
• Oil and gas
• Refining and petrochemicals
• Chemicals
• Pulp and paper
• Subsea
• LNG and cryogenics
• Marine
• Mining
• HVAC
• Water and wastewater
Pour une version française de ce rapport
annuel adressez-vous à:
Velan inc.
7007, chemin de la Côte-de-Liesse,
Montréal (Québec) H4T 1G2 Canada
Tél. : +1 514-748-7743
Téléc. : +1 514-748-8635
www.velan.com